Drinks Americas Holdings, Ltd. (OTCPK:DKAM) FQ409 (Qtr End 04/30/09) Earnings Call August 18, 2009 11:00 PM ET
J. Patrick Kenny - Founder, President and Chief Executive Officer
Good afternoon, everyone and welcome to Drinks Americas Fiscal Annual 2009 Results Conference Call. On our conference call, we have Patrick Kenny, President and Chief Executive Officer, Jeffrey Daub, Chief Financial Officer and Jason Lazo, Chief Operating Officer. Patrick will discuss the fiscal annual 2009 results and outlook and we will then open it up for questions.
As you are aware, the company may make some forward-looking statements during the formal presentation, as well as during the Q&A. And these statements apply to future events which are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where the company is today. These factors are outlined in the press release as well as in documents filed by the company with the Securities and Exchange Commission.
With that, I'll turn it over to Patrick Kenny to start the discussion.
J. Patrick Kenny
Thank you, and welcome to the Drinks Americas year-end conference call. Today, we are going to share with you the obstacles that drinks has navigated over the past two quarters. After meeting those challenges in the recent economic meltdown, I can certainly say to you that drinks today is in the best position that the company has ever been.
We should note however that in the last half year, and exacerbated over the final quarter of fiscal year, from the economic realities we can find that our company was faced with a variety of cross funds of business pressure.
Just as an example, our letters of credit were extremely hard to execute in a timely fashion due to the administrative hurdles placed on us by lenders with short-term financing vendors who had in the past held us in good standing and had extended credit demanded in the economic environment, cash in advance, and some customers particularly in the rational market, and domestic non-alcoholic market that simply went out of existence.
We have been tremendously successful; I want to complement the management team here, in dealing with these hurdles. We cut adjusted spending dramatically. We focused on our existing brands to keep our core brands and inventory. We targeted raising enough money to overcome our production and inventory challenges something that we've succeeded in doing as well as this morning, we made some critical decisions that we know will accelerate profitability and we made sure to bring our beer initiative which is one of the most important things in the company today, to the large position and in fact is well underway. It was those actions that positioned the company for dramatic growth over the coming quarters and leave us with a feeling of accomplishment having weathered this economic storm. By now you’ve had time to review the results of the past year and our recently filled 10-K.
Sales were down over 45% from 4.5 million to 2.5 million, notwithstanding that SG&A was reduced 27% and our losses reduced year-over-year by $1.3 million, a reduction of 21%. Overall our losses per share basis continued the downward trend to 0.06 from 0.08 of the prior year, a reduction of 25%.
Despite these results, Drinks is going through a period of explosive growth of top-line revenue and has profitability with insight in the coming fiscal year. We are extremely confident of these assumptions.
As we went into the economic meltdown, managing Drinks, the single largest hurdle was not the business model. We've noted that works ivs proof of model, it was not the current products. We know that they sell, repeat sell in fact within existing franchises, some for years, some for two years, and not the ability to add product. We've repeatedly proved that we can partner with the preeminent icons in today's media world. It has been simple access to capital to produce in an unrestricted and unrestrained fashion. Having solved that which we will articulate during this earnings call, there are several key factors which will dramatically impact Drinks’ growth over the next two quarters.
We secured the financing that will allow us to produce significant amounts of our product and build inventory. The financing unlike our short-term factoring and asset-based agreements will be cost efficient and extremely flexible. We have orders backlog almost exceeding $1 million but these finances will facilitate the immediate production and that's before any of the beer initiative.
Olifant Vodka has the momentum from the Summer Concert Tour translating to immediate orders and sales in additional markets, even controlled markets were we are not listed, we succeeded in selling under special order listings.
Our international business in Israel has received an $85,000 pre-payment against production from our Israeli partner, you will find that in the balance sheet and we are moving to produce against the $7 million annual contract as fast as new financial facilities will permit us to do.
And as we talk about Kid Rock's, AMERICAN BADASS BEER is ramping up in Michigan beyond all our expectations and proceeding to a national launch in a measured period of time.
What I want to say to our shareholders, is we've navigated through a miriad of challenges and turned the corner and currently feel, it will be proven out in numbers.
Our result shows that current sale at 2.5 million in the most challenging year for small cap company, in a challenging environment. In the coming year before the company reports the first drop of AMERICAN BADASS BEER and we're going to pour a lot of it.
We believe selling the back orders we have continues to expand Olfant and its business that we acquired selling at a rate of a $1 million year and now growing at almost double. And increasing our inventory turns due to production availability from about 1.5 to 4.5 turns beer brings our company to sales levels that may exceed even a year ago. And that is before a full launch of Kid's Rock Beer and the relaunch of Rheingold. Let me tell you through the factual foundation of what are our optimism is based on and outline some of the business issues.
First let me talk about the financing and you'll find the press release has been issued and the 8-K will be filed. But even prior to that, in June, the recent financing we completed with St. George provides the company with $3 million at an effective interest rate of 8.5%, convertible debt market.
Beginning in January the company will begin to draw down $250,000 per month providing us with abundance of capital to build inventory on BADASS BEER as the projects pulls up and to support that exporting initiative as well as our other brands.
This is more operating capital than the company has ever enjoyed by this environment. That will carry on up to 14 months. Combined with this, the company today announced it has completed a $5 million funding after the form of a Series B convertible that will give Drinks Americas access to that capital to further accelerate our growth, and details are now posted.
It's imperative to know that each of these two financings has [completed] market, with respect to the stock price at no discount. Most significantly and as the third element to our new financial position, the company through an individual investor has secured access to 600,000 extremely flexible weather credit for the purposes of accelerating our production, allowing us to receive payment as they produce in a far more flexible and efficient -- allowing our producer to receive payment in a far more flexible and efficient manner reinforcing our drive for an increase in inventory turns and profitability, and immediately this will be put to work in producing our million plus worth of back orders.
We'll continue to produce Olifant accelerating the next cycle of ten containers following our last 12 drived in many markets and is already sold out. And we're ready with orders already having been placed, we are going through a second cycle of orders immediately, increase in all our portfolios turns from 1.5 to 4.5 times per year, speak to itself with respect to the financial implication.
All this is against the backdrop of being able to meet in a totally flexible and aggressive way incredible demand for Kid Rock's, AMERICN BADASS BEER. Those three financial elements we think put the company as positioned never before and its key strategic step positioning us for accelerating growth. I also want to address the balance sheet generally. I want to point out that it is related to our financial condition, our financing, in the balance sheet, there is some mention. To know that the crude expenses include substantial amount of deferred salary on the product drinks management team.
In the coming months we will look to resolve this by some conversion to equity. In addition, [inaudible] old management team we believe in this environment our recent financings and the availability of cash, the company will allow us to negotiate a substantially reduction in our payable schedule. We will update shareholders as this unfolds
So that is the summary generally of our financial steps. We're feeling particularly accomplished having completed them and what started off as a very tortures economic environment.
Let me now talk about the focus on our portfolio, profitability and execution. We have economic realities leading up to our recent financings and the dramatic changes in consumer consumption and take home patterns forced us to rethink and frankly just to adjust certain plans both strategic and tactical.
Through the cooperation support of our Board and various economic partners, we were clearly required to take these changes into consideration. Primary importance to us was the cost of execution of these projects, inventory that would need to be build and how the decisions we make would speed up or slowdown the commercialization for the key drivers in that book process.
We are taking actions to accelerate profitability, Drinks did not pursue the renewal Old Newman's Own Sparkling Lemonade contract. I would say personally the passing of Old Newman's was significant to me both personally, and as a friend and a business friend, the reality is however the company must focus on profitability and building brand equity value. The company as it disclosed did not own any of the Newman's brand, except we have the right to distribute them and our shipping and warehousing cost driven up by fuel have simply not reduced when the fuel cost went away. In the long-term, this was unprofitable and position that didn't merit Drinks’ further investment. This left us with no choice professionally despite our personal desires.
We wish the whole new Wall Gang which company contributed to, in fact overtime we wanted was largest owners we wish them nothing but success as they take over the sales of this part of their brand portfolio.
We've also closed our existing wine business, the warehouse cost, carrying cost, expense of inventory. You need to be a serious contender in the wine business and that was not openly a small strategic focus. So in the same manner that we led to the Newman’s conclusion, we made the decision on the wine business. We think both of these decisions, for our sales and management to be focused, reduce cost and have less of need for the cash to be tied up.
Drinks remains excited about our sparkling vodka initiative, we moved that to the back of our plans since the project will do better in a more robust economy. Frankly speaking the club brand and club business is off dramatically. We believe that the product and the product profile will flourish openly in the on-premise environment and once it returns to growth, we will start to deal with that product. And currently Drinks is providing Dre with Tequila's taste as an alternative possibility. So that is the hard decision that we had to make and hopefully been candid about them.
On ongoing basis as we said, remain extremely excited. Trump Vodka remains a significant franchise to a strong penetration in urban markets and ongoing success in New York where we are in fact in a list of accounts that exceeds 50 retail accounts in New York, substantial on-premise focused very much, Brooklyn, Chicago, Baltimore, District of Columbia and Texas are all extremely strong markets for Trump.
As a result of our Dutch distillers demanding cash in advance for production, our new financing will [inaudible] some result in production interruptions. Notwithstanding this, the major impact upon Trump Vodka brands has been the impact on Premium Vodkas in the current economic climate. And mainly demands both price promotion and account promotion particularly on-premise is challenging. In the core driven markets, this has not impacted the brand’s sell-through. With production flexibility we can now tell our shareholders that the company is exploring competing with Trump Vodka at a variety of price points and we will keep you updated in the process.
In near term, over the next two quarters we'll be selling immediately 10,000 cases of back order Trump and Israel will come online which we believe will be 6,000 cases a month. We're hoping that we will be in a production position given glass coming from China to produce as of the first to the year. And that has as much to do with the Israeli distributor offsetting his preorders, his market plan and his licensing, but we are very comfortable and confident. The international demand for Trump remains strong. While the market has only ordered several hundred cases since our last large shipment, Russia while volume challenge, I can tell you that Trump Vodka has sold on-premise in Russia for for $300 a bottle. Well this is a challenge when attempting to drive volume in the end market, is usually enforcement of the brands’ international trademark value.
The economy impact to the acceleration of Russian volume and frankly in the case of Germany, the very existence of a distributor who had given us both the purchase order and signed the contract simply went out of business. The combination of our Israeli contract with [Pixo] which remains in place and we fully expect to begin shipping in Israel in the first calendar quarter. We also note that our Israeli partner has paid us in good faith against production total of $85,000 which you will find in the balance sheet as pre payment. [inaudible] of our production capacity for this market and our partners’ full licensing should be in the 2nd December and we hope to be in business in that market January, February.
I don't want to signal in any case an obsolesce of the mentioned of obviously River, Damiana and Aguila as anything other than satisfaction that we've sustained distribution or juggling inventories and now proceed aggressively in building those inventories and increasing sales.
Let me talk about our portfolio additions, Drinks Americas has had three major portfolio additions that will begin to impact our sales and profits. Olifant and AMERICAN BADASS beer with Kid Rock are the ones that are most pre-eminent -- both of them produced in past month with Olifant selling up to 12 containers close to 6,000 cases and Kid Rock beer launching in Detroit selling to-date almost 1,000 Kegs in the first 45 days of availability.
Given where these products are positioned, they suite expansion and will grow in this economic setting at prices point they are at. We've also begun to schedule a reintroduction of Rheingold in the next 12 months to travel alongside our Kid Rock beer introduction. We think that this will be extremely exciting in the metro New York market where there is a demand that a high level of brand awareness for the brand.
We pushed Olifant Vodka in the past fiscal year, and every new restaurant with the brand has met our expectations. The brand was tracking towards 21,000 cases is going to be brought at, actually sold 18,000 cases last year comparable at this point of time. To point in this year, we have sold 12,000 cases and have an additional cycle of orders now being produced, we think we will double actual volume of Olifant based on the recently acquired brand.
We're extremely happy, just in New York and New Jersey, both distributors who ordered two containers in our last order cycle that arrived in June, both these distributors are facing the need to reorder based on sell-through and will be placing an equal amount of product in the next order cycle for production.
A large part of what we believe is driving Olifant comes out of our media and iconic model. Allow me to recap some of what's been driven by that. Of the [inaudible] slightly still good Steven Markley and the Avalon concert tremendously successful in creating brand awareness. Olifant, and anyone can go online and see this had incredible exposure in over 20 concerts in 30 days, played through over quarter million concert goers in the 21 to 35 age bracket.
With over $3 million in gross advertising spend between radio, print, TV, online with Olifant’s name on it. Olifant Vodka presents was on over 200,000 concert tickets and with the vital campaign at 1.5 million hits in the Olifant tour website which I recommend you to go through www.cttconcerts.com.
Over 35,000 e-mail contestants signed up to be the Olifant bartender, bar maid or in the bath tub on the concert stage person. The Olifant bartender and life guard contest or by any definition of direct knowledge of success and gave the brand incredible awareness. The Boston concert at the Comcast center sold out 18,000 tickets which is actually bigger than the recent Aerosmith or Blink 182 concerts.
Olifant presents tour videos on YouTube have already had over 30,000 hits. I urge you go to and see the type of exposure the brand got. We're already in discussions for next summer’s tour, it’s been planned to be bigger and more impactful, but most importantly going into next summer we should have the opportunity to build inventories and impact products presence in markets. Loure Cognac was launched, we have shipped an initial order of 803 cases and that is we believe selling well, we're using the new LC to immediately place an order for an additional thousand cases, in addition to the markets we’ve shipped to, we fully expect to expand to Florida, California and Chicago and a variety of other markets.
[inaudible] will be completing the urban music supporting campaign and bringing its resources to bear on the project in December-January the time period for the season for Cognac, to the additional of the management.
We'll continue to distinguish this project, look to finish our discussions and planning with them and move on to serious impactable marketing to support Loure Cognac. I could just divert a little and talk about market additions. In the critical markets of California and Chicago, we replaced a vacancy left open when Kendall Jackson opted out of the spirits business, notwithstanding their assurances towards that was a decision that they made and we had to deal with.
In California, we've partnered with a new distributor that has multiple warehouse locations, affiliations in the market, and the resources that exceed Golden State Beverage. This past month, they placed their first 500 case order, distributors already sustained numerous chain listings and we think it will be impactful on the state.
In Chicago, with the distributor chains based on distributor change over and acquisition, we continue to sell Olifant through stellar. But our other brands have kind of partnership with Meridian Street Beverage, fourth quarter and sold close to 400 cases in the market already.
Finally for controlled states, in response to our litigation with liquor group and Brandy, we have strategically replaced that distribution with paying customers in numerous states primarily through republic distributing. We are a counter selling liquor group and will not seek remedy through the press or bloggers, or the combination of any of those. But we are very comfortable, we will prevail in this matter, we are also pleased to see our state business remain in demand irrespective where we handle the processing of it we have encountered with these new distributors the added bonus of an accurate and honorable receivable, which we can expect to receive, no pun intended.
Introduction of BADASS BEER, let’s get through what we think is the biggest singular event for the company. Certainly large in Kid Rock's coming year and we think actually impactful on the multi-billion dollar beer market.
AMERICAN BADASS BEER with Kid Rock, last October I detailed in a financial presentation to institutional investors that we'd estimated that the new brand introduction would return between 1.5 million and $2 million in the first years sales.
I am here to tell you that based on the first indications we have on the market, but I am not here to give you guidance or exactly how much given the unfolding introduction has excited us. I am comfortable in telling you that we will most likely see those estimates within the first two years. BADASS has received millions of media impressions. It was born on the 4th July at the Michigan Brewery this year and we introduced that in a soft launch at Detroit July 16th and 17th at this unbelievably exciting Kid Rock double concert at Comerica Park. We were actually sold in the part at I think eight special vendor kiosks at the park and I can tell you that the lines were 30 yards deeps and 12 wide. In addition we also placed beer and a dozen businesses surrounding the park.
We shipped what we thought would be inadequate supply for weekend at Comerica Park. The beer sold out the first night, I was there to witness it, the lines at every kiosk just blew the beer away, the people like the beer. I spoke to 250 of them myself personally. The reviews were beyond our expectations to include the Detroit FreePress.
People are going back multiple times to buy another beer priced at $8. We rush back to Michigan Brewery on the Saturday night or Saturday morning prior to the next concert and loaded up, we could not have dreamed a little more positive response in selling 300 kegs in two days at the stadium in the event.
Not anecdotally, but it’s actually one of the highest profile counts in the stadium area, proximity to the stadium, since that concert night has sold 33 kegs, that's since July 16 to 17. Every account that we sold of the 12 original have reordered and we think there is probably five times as many accounts online right now. The beer is being initially offered in kegs, we will follow with 22 ounce bottles and 12 ounce six packs which will find their way into the market in mid-September. There are four major distributors online in Detroit and Michigan, Powers, Eastown, O&W, and Fabiano in the north. Each of them a key large Miller- Coors distributor. Michigan Beer –Company, our production copacker and partner is ramping up their production capacity and we've insured backup facilities for national expansion.
Michigan Beer Company has a 54000 barrel year production, has already been doubled 250 barrels a week and will increase that to a million cases per year. Distributor progress and the initial brand success can be measured in the beer world in either two ways, number of kegs sold or number of cap handles in the marketplace. Investors will find that will likely lead to amount of dollars profited. To distinguish AMERICAN BADASS to your tap handles which you can see online with the iconic BADASS Eagle are in numerous accounts inDetroit.
One distributor who has been in the beer business, has been in the American Badass beer business since the concerts has close to 35 tap handles in the market and another distributor reports of having 37. As of two weeks ago, their penetration is growing at three per day.
In my opinion, this brand definitely will be a game changer in both revenue and profits as well as impact for Drink Americas. We'll release the beer in a measured fashion, so that we can both mange it and do it the right way.
Michigan will be the beginning of a Midwest introduction that will extend from there to both coasts. Kid Rock fans are nationwide and diverse. The lable presence is striking and commands conversation about the product once consumers see it. At some further dimension there are over a half million beer retail licenses in the U.S. locations for the service by distributors.
In 2008, total beer sales equated to 2.9 billion 2.25 gallon cases of beer. As already indicated today, guidance at this stage is very difficult than a monthly or quarterly basis given the fact that we are producing and shipping all the beer that we can and we will probably be doing so for the foreseeable future.
I will leave you with plain facts as they are however. Regional beer like in Iron City are reported in industry reporting to do approximately $20 to $20 plus million of business in the Pennsylvania market of Pittsburg and Wilkes-Barre.
We know AMERICAN BADASS BEER with this customer feel made in Detroit in fact made in America made Detroit has the potential to far exceed these type of loosely affiliated regional brands even in regions of just people of Michigan, Kid Rock. Balanced along with Kid Rock's commitment to making sure that this happens. The beer is an exponential growth plan to the company. A $20 million brand in Michigan will be 2% of the Michigan beer market. In the next 12 months we will proceed from Michigan to Ohio, Indiana Tennessee and then Nevada. And then we will reserve the right to either add or accelerate certain states, most likely Florida.
The tremendous success of the initial sales are indicative of the momentum that we will have going into next year's summer beer months and hopefully in a far more robust economy.
That’s the summary of our business, the challenges that we went up against, I'd also like to note on the business improvements category that we have a high quality and very interactive website that will shortly be launched. The shift bulk of interaction that we received from the Snoop tour as well as AMERICAN BADASS BEER and the unfolding other initiatives have just given us the need for formal interactive site wherein designer is doing out for us now.
Before we go into questions, if I could just pause a moment and offer a tribute and recognition to a board member, who unexpectedly passed away. Recently Tom Schwarm passed away, Tom was the second investor in the company prior to its going public, one of the most talented beverage industry executives that we had the benefit and pleasure of being associated with. His imprint on the company and surely most recently American beer as beer cannot be underestimated. Tom was always a great friend to all of us in the company and some of who had worked through many of the startup challenges we have faced, so his counsel is very precious to us. We found him to be a man of class and distinction and we will miss, I'm sure not as much as his family who we sent our best wishes to.
So that is the summary of Drinks Americas, we hope that you share with us our satisfaction in getting through an extremely difficult economic period. We hope that we’ve made clear that the financings that we've accomplished, each of the three of them, puts us in a very different place and we look forward to executing this plan dramatically over the next two quarters.
And at that point in time, we leave it open for questions.
Thank you. (Operator Instructions). Thank you. Our first question will come from Craig Duncan, Investor (ph).
Craig Duncan - Investor
Good afternoon, gentleman. I got a question, I'm from the State of Georgia and as far as your distributors as far as the BADASS BEER, are you all going to go with the people that you are doing business with now, that you see Olifant to, such as the liquor distributors, or are you going to go with the beer distributor that would hopefully get and that has as many products that can get fore displays, co-box presentations and shelf presentation?
J. Patrick Kenny
I wouldn't answer that question in a general manner on the earnings call. I will tell you that many of our sprits distributors are coincidentally some of the largest beer wholesalers in the market. We will make that decision on a individual market to market basis where continuing with the distributor who has asked you to execute the beer plan, who happens to be our sprits distributor we will, but we're not going to sprit distributors into beer wholesalers and that's probably the best way I can answer that question in a public forum without analyzing all 50 states here on the phone. Next question?
Thank you. (Operator Instructions). Our next question will come from Valentino (ph), Investor.
Yes. Congratulations on navigating through a very difficult period for any business anywhere. I just have a question regarding the marketing, especially of the new beer product, and I know that the revenues right now I guess preclude any national brand advertising but because Kid Rock is such an iconic brand and an iconic person is there anyway using the new technologies that are new, the YouTube in the world. Is there anyway that you can develop some kind of marketing program just to get the word out for your new product?
J. Patrick Kenny
Yes. I mean let me answer the question on several levels, given what we accomplished with Olifant and Snoop Dog in the national tour, there is no reason that we don't have the capacity as we sit here to initiate and execute something where national marketing initiatives would figure out beer, particularity given the high profile of it.
That having been said, if you go to MySpace or any of the social networking sites, that's where our brands perform absolutely the strongest. There is a site that someone not related to the company constructed on Face Book where something like 30,000 Kid Rock beers have been sent to other parties like simply clicking send my friend a beer.
So we tend to be best positioned with our icons to get that type of viral marketing into the air, and before you know it looks like -- feels like and actually performs and results like a national beer initiative. I was in New York Sunday and the owner told me that twelve people over the past week had asked them for Kid Rock beer, when you have that type of reach prior to even initiating a marketing campaign, you understand the power of what these icons in the business model do.
So the answer to your question is we have the ability to impact national type marketing plans with Kid Rock and planning into the things that he is doing. But yes we're very comfortable and executing a very efficient campaign which is heads and tails it's going to be best in the market, hope that answers the question
Yes. Thank you
(Operator Instructions). Thank you. Because at this time we have no further questions in the queue.
J. Patrick Kenny
Well, thank you very much everybody who did participate and please feel free to follow-up with questions.
Thank you. Ladies and gentlemen, this conference call is now ended. You may disconnect your phones lines. And have a great rest week. Thank you.
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