NewAge, Inc. (NBEV) on Q2 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by. This is the conference Operator. Welcome to the NewAge, Second Quarter 2021 Earnings Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. . I would now like to turn the conference over to Kevin Manion, Chief Financial Officer. Please go ahead.
Kevin Manion: Good afternoon and thank you for joining NewAge Inc's 2021 Second Quarter Investor Conference Call. I am Kevin Manion. I joined NewAge on July 19th as the Chief Financial Officer. I am very pleased to be with you today and will be joined by Brent Willis, our Chief Executive Officer. On today's call, Brent is going to provide an overview of the operations and progress against our strategic initiatives.
Kevin Manion: And then I will provide a summary of our financial performance before we open it up to analyst questions. 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. Factors that could cause these results to differ materially are set forth in our annual report on Form 10-K and 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and 10-Q, which are available on our website at newage.com. I'd now like to turn the call over to Brent Willis, our Chief Executive Officer.
Brent Willis: Thanks, Kevin. We are pleased with our top, middle, and bottom-line performance. Our third consecutive quarter of positive EBITDA. To remind everyone, that was our commitment. But once we got the scale, we would achieve positive EBITDA. Now, the next commitment will be positive Operating income and free cash flow. And we believe we have the scale and the right structure and infrastructure to deliver that and we will deliver as we work through the noise of our integration, synergy pass-through, and frankly, a number of moving parts and onetime expenses that we do not expect to be recurring. Now within the quarter, our acquisitions and integrations of RX and Aliven continue to proceed on schedule and financially on track. Actually, above our expectations and commitment to deliver $20 million in synergies. The leaders of all of the different businesses from RX to Noni, to LIMU to Zennoa to our newest partner Company Aliven in Japan, have now integrated into most of the markets, co-located offices, eliminated redundancies, and maybe most importantly, combined website, systems, compensation plans, and other activities. We hope our investor partners understand that this is a massive and very difficult process, and a set of activities to integrate. But to do it in the first 6 months of the acquisition is I would say laudable and gives us the right foundation, especially systems foundation to now springboard to the next level. Our refreshed website is now live along with the consolidated commission System, which is unique to our industry, and it allows for our brand partners to earn a commission for their efforts based on a one-of-a-kind multi-line payment structure. I'd like to thank our team for the long hours involved to facilitate the integration. and also pre-thank them for the subsequent hours that I know are going to be coming through the challenges that are always arisen post-consolidation. Now, as the companies combine and we strengthen all of our organizational capabilities, we have added Kevin Manion as our Chief Financial Officer and Carin Casso Reinhardt as our Chief People Officer. These two leaders, in my view, are best-in-class in their respective functions, and importantly, have the bandwidth to lead their groups to become the major multinational that we are on track to becoming. Now, Kevin and Carin are embodiments of our shared service team that will span all of the current and future operating companies and business units. I do want to mention as in aside that our current Senior Leadership Team is more than 50% women military or minorities. This is reflective of our commitment to diversity, inclusion, and opportunities. Overall, Company sees no representation is at a 47% rate. And amongst our brand partners is above 70%. Many of whom are fellow shareholders. We are committed to ensuring our Company provides opportunities for everyone in every corner office of the Company and in every corner of the world. Building on this area, I believe it is a good time to remind you of what NewAge stands for, and the operating values and principles that NewAge is committed to. Number 1, we go big and endeavor to change the world with healthy products, driving wealth and sharing the wealth with all that contribute to our success. Number 2, we never compromise. In what we stand for and how we operate with integrity above approach, and in what we do. With no compromises ever, in the quality, efficacy, and health of our products, integrating the best of both science and nature. Number 3, we share ownership and owners -- fellow owners focus on what matters and deliver no matter what. Number 4, we are accountable. We're metric-driven and disciplined, and we do what we say we're going to do. And finally, number 5, we live family. We are building an inclusive culture that embraces diversity and invites others willing to align to our purpose and embodying our culture to be part of this special Company we are creating. We believe that in the long run, culture trumps strategy every time. Although we are in the first inning of our Company and the first inning of building our high-performance culture, we have the leadership team to build it, and the additions of world-class executives like Kevin and Carin adding to the others, we already had internally put us in a very strong position. Now, that's the how our values and our culture. Now to the what? With our strategy, healthy science-backed functionally differentiated brands, delivered in a direct to the consumer distribution system that we called D2C aggregating a global team of Brand Partners really influencers, enabled with the leading social selling tech in the industry. Our Brand Partners are our competitive advantage, and so on trend with what is driving consumer's purchase behaviors these days, over 72% of our revenue is derived from e-commerce auto-ship orders from our website, and more than 85% of our orders are delivered directly to customers around the world, correlating to more than 500,000 drop shipments direct to consumers homes every single month, in what we call our direct-to-consumer, D2C, business model. So, our model, even at this early stage, is really working and beginning to unfold. And we are beginning to be recognized for it. NewAge was awarded as the most innovative Company of the year by the Coveted Goldman Bridge Business and Innovation Awards. Other winners included IBM and Wolters Kluwer so we are in good Company there. And one of our new products, the Tahitian Noni super fruit wellness shot was selected as the product of the year. We received additional accolades from both the 42nd Telly Awards and the Hermes Creative Awards. Two internationally renowned institutions that recognized NewAge for our digital direct-to-consumer and social media marketing. These wins represent our dedication, providing our brand partners and influencers with world-class content, assets, and tools to drive their businesses and relevant media execution for millennials and Gen Z consumers, that frankly now comprised more than 50% of the global population. And I'd also add at this -- fortuitous time with the Summer Olympics taking place, we're proud to announce that 33 of our nutritional products -- 33 of them, have been included on the globally renowned global Cologne List, which is the world's premier anti-doping testing organization. The Cologne List was initially developed out of a study sponsored by the IOC, the International Olympics Committee, to help protect athletes. And having an athlete's council comprised of world-class athletes, we have the responsibility to understand the impact that the substances can have on them. Every step of our product development process meets or exceeds their rigorous testing standards and our inclusion on the Cologne List in Germany, demonstrates the quality, safety, efficacy of our approach and our premier products. And speaking of a trusted resource, we're also excited to report that our children's chewable vitamin Nutrifii Kids has been included in the Physicians' Desk Reference, also referred to as the Prescribing Digital Reference, that now exists solely online. I am so proud of the team with the credibility we are gaining. And again, we're just getting started with our portfolio. The PDR, this Physicians' Desk Reference, is by far the most widely trusted and used directory of ethical pharmaceutical and biological products published for the medical field. No medical reference is more respected or recognized. All of these new products, all of the marketing, and other initiatives are driving top-line growth. That overall, in the quarter was up 98%, versus the prior year. As reported, we were up significantly in Europe and the U.S., both regions contributing attractive double-digit growth. Our focus, however, is to continue to make improvements in EBITDA margin. To this end, we are working on capturing synergies and importantly, ensuring that they translate to the bottom line, further reducing our SG&A that Kevin will review. And at the same time improving our Gross margin. We recently announced the sale of our United States production. Actually, just an office in filling facility to TCI, a Taiwan -based public Company and world-class manufacturer. We are aligned with TCI to improve our cost of goods sold by up to 20% in the next few years. And also, through the transaction, we're able to reduce almost $1 million in annual administrative costs. We will also receive $3.5 million in cash and a share of the revenue from TCI over the next 5 years. So, this is just an incredible deal for both NewAge and TCI. In addition to the financial benefits for both parties, we both get to focus on what we do best. And in the case of NewAge, we intend to continue to focus on what we can be best in the world at. And if we can't be the best in the world at it, we will outsource it. We have a lot more actions underway to improve the cost of goods sold, and this is just one of them. In our strategic plan period over the next 3 years, we expect to approach 75% in Gross margin. And we have the roadmap in place to get there. Look, in the middle of this now endemic, our cost and shipping and supply chain are under pressure as is top-line growth. But we are proving resiliency in the top, middle, and bottom lines of the business. Growing our top-line by adding more brand partners, expanding our social selling tools and e-commerce subscribers, strengthening our middle lines, both at the cost of goods sold level and SG&A, and translate again to the bottom-line results with consistently improving profitability. And with that, I will pass it over to Kevin to review the details of the quarterly financial performance. Kevin.
Kevin Manion: Thank you, Brent, and good afternoon from our global world headquarters in Denver, Colorado. I'll start by discussing our financial results for the Second Quarter, followed by comments on our balance sheet. Please note that all comparisons are year-over-year unless otherwise noted. We will also be discussing non-GAAP results and a reconciliation of non-GAAP financial measures is included in our earnings release in 10-Q. On a consolidated basis, 2nd quarter revenue was 124 million compared to 68 million, which is a 98% increase over last year. This was primarily driven by the acquisitions of RX and Aliven in which we completed late in the quarter. These acquisitions indicate our continued commitment to our social selling network and our direct-to-consumer route to market strategy. Last year's revenue also included $3 million from the retail brands business, which was sold in Q3 last year. On a regional Pro forma basis, our largest market, which is Europe, grew 24%, the United States, which is our second-largest market, increased 15%. These Pro forma increases were offset by declines in China and Japan. The decrease in Japan was further impacted by the local government-imposed moratorium and recruiting new Brand Partners, which will be lifted this September. The current and continuing impact of COVID remains a negative impact on all our markets. Also, on a Pro forma basis, FX rates benefitted revenue by 3.9 million. Mostly in China and the EU. Gross profit increased from 38 million to 84 million, primarily due to the organic growth, margin enhancement activities, and the additions of RX and Aliven. Overall Gross margin percentage increased from 60.8%-67.6% due to the positive impact of higher RX margin rates and the disposition of the retail brands business I just mentioned. Beyond the financial metrics, we are also enhancing all of our internal metrics for all functions, and we'll be sharing some of these metrics with you in subsequent quarters. SG&A increased from $26 million to $41 million, primarily, again, due to the addition of RX -- other companies that were added to the NewAge group at the end of November last year. Although this has an increase on an absolute dollar basis, SG&A as a percent of revenue decreased from 46% to 33% this year. This reduction of 13% points is a result of capturing cost synergies on a higher revenue base. Despite this progress on SG&A, our objective is to be at the industry average of 25% of net revenue. Adjusted EBITDA improved from a loss of 5.5 million in Q2 of 2020 to a positive of $1.7 million. We will continue to report and discuss Adjusted EBITDA as a key metric cue to manage our business going forward. Included as an add back to adjusted EBITDA is a $4.3 million charge related to the sale of the retail brands business that was sold last year. This is the impact of trailing liabilities and a note receivable, which we have deemed will not be collectible. This is identified as a separate line item on the Income statement in the queue. Net Income was a positive $17.4 million or 11% per share. An increase of $0.21 versus the second quarter of last year. Net Income will continue to be significantly impacted by the change in fair value of the derivative liability, and liability-classified warrants. which was $31 million this quarter. These instruments were used in our acquisitions and current financing. In essence, an increase in our stock price has a negative impact on the change in fair value and accordingly, Net Income. while a decrease in our stock price has the opposite effect. Turning to the balance sheet, we have $92 million of cash and $31.5 million of debt. In the early part of this third quarter, 9.7 million PPP loans were forgiven. As Brent mentioned, our focus is on expanding our EBITDA margin, enhancing free cash flow, and driving profitable growth. The projects for reducing the cost of sales and SG&A costs are already underway. And coupled with additional actions which we expect to initiate with our teams soon, this will further expand our margins. We have an attractive balance sheet in cash position and we believe we have access to more favorable forms of debt going forward that will enable us to reduce interest expense and pursue additional growth opportunities. To close, I'm very happy to be here as part of the NewAge leadership team. I believe we have a strong financial foundation and a fairly strong financial flexibility to pursue our growth agenda. There are many improvement opportunities that are being identified, and I am confident that the team will be able to capture those. As far as the future view, there are still too many moving components, including the continuous spectrum of COVID on our Brand Partners and our rapid growth from acquisitions. As we gain more visibility and begin to deliver on operating efficiencies and capture the synergies of the acquisitions that we have already discussed. I will be able to provide guidance. I expect us to be in Q1 2022. And with that, I'd like to turn it over to the operator to open up the line for questions from our analysts.
Operator: Thank you. We will now begin the question-and-answer session. We will pause for a moment as callers join the queue. The first question comes from Aaron Grey with Alliance Global Partners. Please go ahead.
Aaron Grey: Hi, good evening and thank you for the questions.
Brent Willis: Hey Aaron.
Aaron Grey: So, first question for me -- hey, how is it going? Brent talks about prior COVID opened up the opportunities for the direct selling model to sell beyond just maybe face-to-face meetings, you guys opened up, the more the interactive video conferencing meetings. So, as I said, could you provide your main input in terms of now where you see things, you're not really in terms of some of the long-term impact, do you believe that might speak in terms of the direct selling model seems to be in a well-suited with some of your micro influenced initiatives?
Aaron Grey: And then also maybe if you could provide some color on how you plan to leverage that with the new announcement with Verb. I think that'd be helpful. Thank you.
Brent Willis: Great question, Aaron. I do think that COVID is an accelerant for this model, right? And the move towards direct-to-consumer, route-to-market delivery, whether it's from Amazon or its buy now buttons on a plethora of media sites or the entire direct selling industry, COVID has really been an accelerant. And with the many consumers working from home too, and all looking for new sources of income, especially in developed markets, it has been a good underpinning for A, a move towards direct-to-consumer delivery and social selling. So, we think the underpinnings of our business model are really strong and it really is this accelerant in the whole social selling round, which is really our focus. So, we have this group of more than 400,000 brand partners and customers and we just are building on that as fast as we can. And that's one of the reasons we're seeing such good growth in Europe and the United States. So COVID does impact us everywhere negatively in terms of the ability to operate. But for the most part, we've been able to work through that and offset the negative impact of really not being able to operate in Indonesia, having ups and downs in Japan and other parts of Southeast Asia and Latin America. But the social selling and frankly, the tech that we've already employed with our frictionless checkout with Smart Link and some of the new tech that we're rolling out, like Verb,
Brent Willis: like you said. I mean, these are best-in-class apps that enable all of these brand partners and convert them from what used to be pure relationship-based selling to now, all social selling, fully leveraging their networks and new networks as people respond to their influence, whether they'd be a nano influencer, that's fine, with only a couple of 100 followers to a micro-influencer with 1000 of followers to regulars’ influencers and large influencers with more than 10,000. We have them all, and we love them all. And we're just enabling them with the right logistics, the right products, and the right support, and the right training as we expand out where we think is really an on-trend business model.
Aaron Grey: Thanks. question for me then. Element outflows for the long with the integration of RX. I just wanted to -- could you speak to you are today with the Company in terms of maybe hunkering down on the existing business or still exploring further M&A opportunities. You previously mentioned other markets in the past get a gate in terms of where you feel the overall environment is today with the existing business and future opportunities via M&A. Thank you.
Brent Willis: Yeah. On the core business, we're focused on 4 regions, which are Japan, China, Western Europe, and the Americas. We're still focused on these core regions and we see a lot of organic growth opportunities there. So, we are launching a whole range of new products. Leveraging, some real competitive advantages that we have within our core platforms. We see a lot of organic growth opportunities in front of us so that's one focus.
Brent Willis: The second focus that I want to ask Kevin to talk to is improving EBITDA margin. But the third focus to your question is on M&A and M&A has 2 benefits, in addition to providing the scale and strengthening our position in those core markets and within our core platforms by getting more scale and continuing to employ our 3G-like synergy model that increases our overall revenue, but it decreases the relative SG&A and as a percent of net sales to continue to drive EBITDA margin, which is a key focus of Kevin. A key thing that we believe is going to drive equity price appreciation for our shareholders. And Kevin really brings a whole wealth of experience, not just in M&A, and M&A integration, but also in terms of driving holistic financial performance. Kevin.
Kevin Manion: So excited, we're creating all the metrics and the roadmaps as we speak. And we can update you in future quarters on all of that.
Aaron Grey: Alright, great. Thanks. I'll come back in the queue.
Kevin Manion: Thanks, Aaron.
Brent Willis: Thanks, Aaron.
Operator: Once again, if you have a question,
