Winc, Inc. (WBEV) on Q1 2022 Results - Earnings Call Transcript
Operator: Greetings, and welcome to the Winc First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Thelen. Thank you, Matt. You may begin.
Matt Thelen: Thank you. And welcome to Winc’s first quarter 2022 earnings conference call. Joining me on today's call are Geoffrey McFarlane, our CEO; Brian Smith, our President and Chairman; and Carol Brault, our Chief Financial Officer. In a moment, you will hear brief remarks from all three followed by a Q&A session. By now, everyone should have access to the earnings release for the first quarter ended on March 31, 2022 that went out earlier this afternoon. The earnings release is also accessible on the company's website at ir.winc.com. And shortly after the conclusion of today's call, our webcast will be archived on the website for the next 30 days. Today's call will contain forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements includes statements concerning our total addressable market, liquidity and capital resources, financial and business trends. The impacts of COVID-19 on our business and global economic conditions, our ability to obtain adequate financing and continue as a going concern and our expected future business and financial performance and can be identified by such words as believe, may, will, estimate, continue, anticipate, intend, expect, could, would, project, plan, potentially, preliminary, likely and similar expressions. Although, we believe that the expectations reflected in the forward-looking statements are reasonable. We cannot guarantee that the future results, performance or achievements reflected in forward-looking statements will be achieved or will occur. Any forward-looking statements made herein speak only as of today's date. And you should not rely on forward-looking statements as predictions of future events. Except as required by applicable law, we undertake no obligation to update any of these forward-looking statements for any reason after the date of this call or to conform these statements to actual results or revised expectations. Forward-looking statements by their nature address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For discussion of the material risks and other important factors that could affect our actual results. Please refer to the risks discussed in today's earnings release. Our annual report Form 10-K filed with the SEC on March 30, 2022, and our other periodic filings with the SEC. During the call, we will also discuss certain financial measures that are not prepared in accordance with generally accepted accounting principles. For more information on the use of these non-GAAP financial measures, including a reconciliation of each to its nearest GAAP equivalent, please refer to our earnings release. Further, throughout this call, we provide a number of key performance indicators used by our management and often used by competitors in our industry. These and other key performance indicators are discussed in more detail in our earnings release. With that, I will turn the call over to Geoff.
Geoffrey McFarlane: Thank you, Matt, and good afternoon. It is my pleasure to speak with you today to discuss our first quarter results. Following my opening remarks, I will turn things over to Brian who will give an update on our core brand portfolio. Then Carol will discuss our Q1 financial results in greater detail before we open the call for questions. Our latest results demonstrate solid execution against our core strategies for driving top line growth and improving profitability. We continue to experience strong demand in the first quarter and our year-over-year net revenue growth accelerated sequentially to 5.7%, underscoring the power of our unique omni-channel model. Wholesale remains a leading factor in our continued growth with revenues increasing 75.1% to $5 million, driven by expanding distribution, shelf placement and retail velocities. We ended the quarter with 9,348 accounts, reflecting year-over-year growth of 62.2% with on-premise opening up nationally and continued growth at major national retailers like PLCB, Target and Whole Foods accounting for most of the gains. Importantly, we believe we still have meaningful headroom for further wholesale channel growth, relative to our target of 50,000 retail account presence over the next several years. Summer Water saw the number of accounts increased by more than 70% compared to the first quarter 2021. And with an all commodity volume of just 3.1%, we believe it has significant runway for future growth. In DTC, revenues were down 6.7%, which was unsurprising as we continued to compare against major increases in the prior year period, driven by COVID-related impact on the consumer demand. Importantly, underlying metrics in direct-to-consumer remained very strong, including an 11% increase in average order value and an increase to 5.4 bottles per order. Moreover, we demonstrated significant progress optimizing our promotional activities and customer acquisition efficiency as first quarter marketing spend was down 36% versus last year. A shift in product mix towards imported wines in the wholesale channel, as well as excise tax timing and higher logistics related expenses for the DTC channel adversely impacted margins in the first quarter. Despite these challenges, we delivered a consolidated gross margin about 40%, a level that we believe supports long-term profitability metrics as our business continues to scale. We remain diligent in managing inflationary factors and aim to improve margin as 2022 unfolds. Finally, we’ve made significant strides on our path to profitability and remain confident that our current trajectory will allow us to achieve adjusted EBITDA breakeven in the next several years, if we are able to maintain our current growth levels and limit operating cost increases. Our adjusted EBITDA loss improved 47% sequentially over Q4 2021 to $3.1 million in the first quarter and net cash used in operating activities improved by 34% on a sequential basis. We’ve made major investments in inventory over the past several months, which we believe we can leverage to provide operating liquidity, plus we are negotiating additional credit facilities to provide capital to meet our liquidity needs including repayment of our existing debt. From a margin perspective, we believe we have ample opportunity to expand margin through pricing at our top wholesale brands, our fast growing consumer categories like rosé and organic Prosecco. And we expect to see price increases in these categories as a whole. Specifically, our Summer Water business has important competitive advantages related to international peers who are facing large freight pressures. Summer Water also is picked early in the harvest season has a rapid fermentation cycle and an early release in the season providing the opportunity for a fast return on invested capital. All of these factors support our confidence in the potential for growth and profitability, and we believe our existing inventory levels and potential access to debt financing can finance our organic growth. Now I will turn it over to Brian Smith to discuss our core brand portfolio, wholesale growth and some things to look forward to in the coming quarters.
Brian Smith: Thank you, Geoff. We are pleased with our progress in the first quarter, which reflected broad based growth across our portfolio. Our core brands, which we define as having individually generated more than $1 million in net revenues through the direct-to-consumer channel and more than $0.5 million through the wholesale channel in the last 12 months collectively grew in case volume sold by 42.6% versus the same period last year. We currently have five core brands, Summer Water, Folly of the Beast, Wonderful Wine Co rebranding as Wonders, Chop Shop and Lost Poet, all developed internally, and which helped fuel our wholesale channel growth with retailers across the country. Retail expansion is the primary growth driver for wholesale, and we added 3,584 new accounts in the first quarter, an increase of 62.2% versus last year. We’re excited to announce recent retail placements of our top brands with total wine and more and BevMo along with deepening relationships in the form of additional shelf placements at the likes of Whole Foods, HEB, Publix, Harris Teeter, and Giant Food. Organic remains a major area of focus as we seek to capitalize on the tremendous growth in this burgeoning category that closely aligns with our core demographic of millennial and Gen X consumers. During the past year, we’ve tripled our organic brands offering, including top brands, such as Cherries & Rainbows, Pizzolato, Biokult, and Les Hauts de Lagarde. Pizzolato our organic Prosecco brand grew to 9,747 cases sold in Q1 up 40.8% from 6,922 cases sold in Q3. The first full quarter following Winc’s acquisition of the importation rights to the brand. As we hit the heart of rosé season, we have some exciting activations to drive awareness and digitally influence sales of our top brands at retail partners. In addition to digital activations and live events across the country, we’re proud to announce that Summer Water will be the official wine of the iconic Hollywood Bowl. In addition, Summer Water Societé, our rosé subscription will be launching this month. As a part of this launch, we’re pleased to announce the release of Summer Water orange, orange wine is an increasingly popular category for consumers with sales increasing 2,583% in 2020 versus the prior year according to Drizly BevAlc Insights. The brand will be initially launched on summerwater.com as a web exclusive. Finally, we continue to invest in innovation to drive growth and leverage the strength of our omni-channel platform. Our innovations target many of the largest trends in the space such as better for you, organic, no or low alc and alternative formats. We recently announced the launch of Wonders line, a no sugar added organic and sustainable wine acting as a pillar of Winc’s core brand portfolio. The initial release will include red, white and rosé varietals, and the brand will be available on winc.com this year followed soon after at retail locations. Overall, better for you wines nearly doubled in volume in 2020 and are expected to accelerate further and approach 3 million cases in the U.S. by year-end according to Impact Databank. In Q4 of this year, we expect to release GOOD TWIN an organic non-alc wine brand. This is an emerging category with younger consumers and while we will launch in direct-to-consumer first, we’re already receiving interest from key national retailers. Now, I will turn it over to Carol Brault to discuss our Q1 financial results in greater detail.
Carol Brault: Thanks, Brian, and good afternoon, everyone. Let me run through our Q1 financials. Total net revenues for the first quarter were $18.5 million, an increase of approximately $1 million or 5.7% compared to the first quarter of 2021. Wholesale net revenues increased 75.1% to $5 million, as we continue to expand our retail account, increase the number of products sold through each retail partner and the rate at which the products are sold. DTC net revenues decreased 6.7% to $13.3 million, reflecting lower order volumes as COVID-19 restrictions were lifted, partially offset by increased average order value, which was up 11.7% from the same period in 2021. Gross profit was $7.4 million a 5.1% decline compared to the prior year period. On a consolidated basis, gross margin was 40.3% compared to 44.9% in the prior year period. Gross margin in our DTC segment was 42.4%, representing a 300 basis point decline as compared to the first quarter of 2021. The decrease is primarily due to increased excise tax costs period over period, as credits were utilized for the three months ended March 31, 2021, as well as increased logistics related expenses. We continue to strive to minimize the impact of global supply chain constraints and inflation by focusing on operating efficiencies and driving growth of our high margin core brand portfolio. In wholesale, gross margin was 35.1%, a decline from the 40.7% gross margin in the first quarter of 2021, due to a shift in product mix to an increased percentage of sales of imported wines with higher freight costs and overall lower margin. Total operating expenses increased by $3.2 million or 36.2% to $11.9 million. Most of this increase was attributable to growth related initiatives and cost of operating as a public company. Marketing expenses decreased $1.5 million or 35.6% versus last year, reflecting decreased digital advertising expenses in the quarter. Personnel expenses rose $1.8 million or 74.2% to $4.2 million, primarily attributable to a $0.8 million increase in stock-based compensation expense, and $0.9 million increase of expenses related to increased headcount to support growth of the business. We expect personnel expenses to stabilize during the remainder of 2022 and we believe we have sufficient personnel to support public company operations and continue to scale our business. Net loss for the first quarter of 2022 was $4.2 million or $0.32 per share compared to a net income of $0.6 million or $0.06 per fully diluted share in the first quarter of 2021. Adjusted EBITDA loss for the quarter was $3.1 million versus loss of $0.4 million in the prior year period and $5.9 million in the fourth quarter of 2021, a 47% improvement on a sequential quarterly basis. The company incurred stock-based comp expense of $0.8 million. This declined in adjusted EBITDA of $2.7 million was primarily attributable to a decrease in gross profit and increase in personnel and other G&A charges related to building our team for high growth and supporting public company operations. At the end of March 2022, we had cash and cash equivalents of $4.3 million and $3 million of borrowing under our line of credit, which matures on June 30, 2022. While we believe we will be able to extend the maturity of our line of credit and obtain alternative debt financing, if we are unable to do so, there are no assurances we will be able to repay our outstanding borrowings at maturity and continue as a going concern. However, assuming we are successful in extending our current credit facility or obtaining adequate alternative financing, we believe we will have sufficient capital from leveraging existing inventory reserves and potential access to additional debt financing to finance our organic growth and repay our existing debt obligations. Now I’ll turn the call back to Geoff for closing comments.
Geoffrey McFarlane: Thanks, Carol. We remain focused on building our portfolio of brands, leveraging our investments in the DTC and wholesale channels and optimizing operational performance as we continue to scale our business. We aim to deliver products from our robust innovation pipeline to consumers in order to support the ongoing demand for exciting new products from today’s younger consumers, and believe that our existing portfolio of core brands has significant room for growth over the coming years. We believe our technology platform and deep relationships with wholesale and retail partners uniquely differentiate us within the industry and support our long-term growth expectations. Finally, with our current balance sheet position and assuming we are able to secure adequate additional financing, we believe we have sufficient liquidity to continue executing on our goal to scale to profitability. With that, we are ready to open the call to your questions.
Operator: Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from Bobby Burleson with Canaccord. Please proceed with your question.
Bobby Burleson: Hey, good afternoon. Thanks for taking my questions. So probably like the first one would be just on the EBITDA breakeven comment you guys are now talking about I think the quote was the next several years. Curious how that – if you can just remind us what the earlier color was on that I thought you guys were potentially pulling that in a little bit. Did something change?
Geoffrey McFarlane: Nothing there, Bobby, thanks for the question. I think we are – we’re targeting improvement quarter-over-quarter and just as you know, we haven’t provided specific guidance on revenue or EBITDA so not providing specific guidance on that. But as you saw the sequential improvement from Q4 of 2021 to Q1 of 2022, we expect to continue to improve quarter-over-quarter and aiming for it to be as soon as possible here and still feel like we’ve got a very clear path to that in a very reasonable timeframe and that we’ve got the balance sheet to do that with the right refinancing of our debt.
Bobby Burleson: Okay. And then with the refinancing of your debt, so what does the right refinancing look like and what – how much capital – how much do you need to bring in? And how are those negotiations going? I know you’re working on that.
Geoffrey McFarlane: Yes, absolutely. So we’ve got, Bank of California was a good partner for us. It was really originally with Pacific Mercantile Bank, but then Bank of California acquired them. And so they’ve really changed the way in which they’re viewing their lending. And so they’ve become not the right partner for us, but they’ve been great in extending it. We’re extending it to June 30. And then we’ve had some really positive conversations with them and expect to continue an extension there, while we find another partner for us. Looking for $5 million to $10 million of AR and inventory debt, really asset – an asset baseline of credit and have a number of term sheets that we’re reviewing today that span a bunch of different ways to look at it. So we’re really just working on trying to find the most efficient cost of capital and good long-term solution for the bank is the right – sorry for the company with the right partner and have a number of options. So just making sure that we find the right option that reduces or that finds us the least expensive cost to capital.
Bobby Burleson: Okay. And then just on the mix shift, the product mix shift the gross margin kind of headwind there. Is there – is that kind of a moving target in terms of the margins you’re seeing for that import business? Or is it stabilized somewhat?
Geoffrey McFarlane: Yes, great question. So that really is a – I mean, it is more of a Q4, Q1 factor. The product mix goes up in our import business as it’s not summer water season, basically. So in Q2 and Q3, the product mix goes back in our favor and provides us some nice tailwinds on margin. And then – but the great news is, is that that import portfolio the Natural Merchants acquisition has been performing great and growing really nicely and provides solid working capital dynamics in comparison to Summer Water where we produce the product. So, we can turn that inventory a lot more each year. We definitely saw on Q4 and Q1 significant and increases in freight in bringing those products into the U.S. And that was a headwind, but because we’re in the organic space and one of the leaders there, it’s provided us with some more pricing ability and elasticity to adjust pricing. And so we’ve done that. And so we feel really good that the margins are stabilizing. The product mixes improving as Summer Water has higher gross margins than the import portfolio. But the import portfolio is providing great growth as we’ve seen in the wholesale side and should provide stabilizing margins. So we’re excited about what the rest of this – the potential the rest of this year could bring.
Bobby Burleson: And the Natural Merchants business is that as you open doors retail accounts for that, are you able to sell through additional core product? How wide ranging does the relationship become, because it sounds like you guys have something that’s besides Summer Water, which opens a lot of doors. Are you able to open up account on the Natural Merchants and then sell through some other product?
Geoffrey McFarlane: Yes, absolutely. I mean, there’s a product called Pizzolato Muse that’s been growing extremely quickly. It’s a Prosecco, that’s got Rosé and brut that is just growing extremely rapidly and it is opening a lot of doors for us. And ultimately, Summer Water benefits the Natural Merchants portfolio and the Natural Merchants portfolio is benefiting the rest of our core brands. And so, we’re seeing really positive metrics in each of the areas of growth that you’d look for in wholesale. And that’s points of distribution is a great leading indicator of future growth. But we’re also seeing growth in the velocity of our SKUs, as well as just the number of SKUs at each point of – at each sort of retail door. So, we’re seeing positive results in each of the three key factors that would really show growth in the wholesale side.
Bobby Burleson: Great. Thank you.
Operator: Thank you. Our next question comes from Barry Sine with Spartan Capital. Please proceed with your question.
Barry Sine: Hey good afternoon. Thank you. A couple of questions, if you don’t mind. First of all marketing expenditures were down year-over-year. Was that strategic? Was it seasonal? Or was that more of a cash management decision to reduce the marketing spend?
Geoffrey McFarlane: Yes. Yes, so, I mean, we’re certainly, I mean it’s a little bit of each, so it’s not seasonal. What we’re seeing is, that we can – we’re finding more efficiency with our marketing, which is a good thing and that lowering the cost to acquire our customer, which allows us to spend less. So that’s a positive for us. At the same time, we certainly realize that profitability is extremely important in this market. And so we are making strategic decisions to grow a little less quickly and to move the business more quickly towards profitability. So it’s the factor of each of those pieces that’s driving the lower marketing expenses, but ultimately it means more efficiency out of the business, which is a good thing.
Barry Sine: Okay. On DTC, obviously that was down year-over-year, obviously a year ago was benefited by the pandemic. In the earnings release, you talk about there’s four things that you’re going to be doing in the coming quarter to boost that to get that back to growth again. I wonder if you could elaborate on each of those four items, what specifically are you doing? Give us a little more color on how you’re going to get that DTC growing again?
Geoffrey McFarlane: Yes. It’s – I mean, it’s really a multitude of factors. I mean, I think what we’re doing is balancing the business towards profitability and being less focused on top line growth in the DTC channel where we’ve got significant scale and really just focusing on faster payback on customers. What we’re really focused on is, driving happier customers. So continue to focus on overall user experience and the products that we’re offering, continue to improve the technology and the customer experience. Continuing to improve the marketing mix. As we mentioned, which is really as I mentioned finding more efficient marketing. And then one second, just pulling up the – making sure I cover each of the four topics that we talked about here. And then the last thing that we’re really focused on is, so it’s marketing efficiency. It is customer experience, and then it’s really opening up new opportunities like the summerwater.com website to bring customers through additional funnels. Like that is, those are the three areas that are really going to focus on driving growth for us.
Barry Sine: Okay. And my last question, I want to get a picture. So, we can better understand the liquidity over the next several quarters. This is several factors I’m looking at, obviously you ended with $4.3 million in cash. You took down another $2 million on the credit line. I think you’ve got two more left to go. You’ve just said, you’ll probably get an extension on that before you announce a new credit line. The other factor that I’m wondering about is, if I look at your inventory, obviously, Summer Water is your biggest selling product. That’s a seasonal product. So you can probably convert some of that inventory. I assume you’ve got a lot of cases of Summer Water and the two warehouses. So if you could talk us through what should investors expect on cash flow and liquidity and that balance sheet over the next, let’s say two quarters as we go through the Summer Water selling season?
Geoffrey McFarlane: Yes, absolutely. Great question. So, that’s exactly, I mean, a good framing of exactly what we’re doing. So number one, getting the extension on the debt, and feel like, that’s in a good place as well as lining up additional partners that will be long-term partners for us, 24 months on those deadlines. So that’s number one priority, and we feel like we’re making great progress there and moving there. And then on the operations of the business your point is exactly right. We ended Q1 with $23 million of inventory almost an additional $4 million in prepaid inventory on the balance sheet. So, when you add those two up $27 million in inventory, that will be a source of cash for the business in the second half of the year. That along with our expectations, or we believe will be reducing losses in each subsequent quarter. So, you’ve got the extension of debt and then inventory is a cash source. And so we expect to be lowering our debt using inventory as a source of cash, as well as progressing business towards profitability and with each of those factors in the budgeting process that we’ve done, we believe, we won’t need to raise additional equity with the plan as long as we can find the right debt partners.
Barry Sine: Okay. That was fantastic. Thank you very much.
Operator: Thank you. There are no further questions at this time. This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.
