Truett-Hurst Inc. (NASDAQ:THST)
Q3 2016 Earnings Conference Call
May 10, 2016 04:30 PM ET
Christine Hergenrother - IR
Phillip Hurst - President, Director and CEO
Paul Forgue - COO and CFO
Good afternoon, and welcome to the Truett-Hurst Inc. Third Quarter Earnings Call for period ended March 31st 2016. All participants will be in a listen-only mode. [Operator Instructions] Please also note that today’s event is being recorded.
I would now like to turn the conference call over to Christine Hergenrother, Controller, please go ahead.
Thank you and hello everyone. I want to thank you for joining us for Truett-Hurst Inc.Third Quarter Fiscal 2016 ended March 31st 2016 earnings call. Joining me today are Phillip Hurst, our President and Chief Executive Officer, and Paul Forgue, our Chief Operations Officer and Chief Financial Officer.
This afternoon’s conference call contains forward-looking statements based on our current expectations, numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of our factors that will determine future results are beyond the company’s ability to control or predict. You should not place undue reliance on any forward-looking statements and the company undertakes no obligation to update any of these statements whether due to new information, future events or otherwise. There are many factors that may cause our actual results to be materially different from any future results expressed or implied in these forward-looking statements, including all the risk factors in our 10-K that was filed on September 28, 2015, and also available on our website. And with that, it is my pleasure to turn the call over to Truett-Hurst’s President and CEO, Phillip Hurst.
Thank you very much Chris, and thank you all for joining the call again today. Today we're going to follow the same format that we've been using for the last several quarters. Paul Forgue will provide the financial update and take you through quarter by quarter review. I'll provide a brief business overview and give you some updates on customers and some of the macroelements surrounding our business. Then we'll conduct a brief question and answer period and I'll provide some closing remarks. So now I'll turn it over to Paul Forgue for the financial review.
Thank you very much Phil, good afternoon everyone and thank you for taking the time to listen into our call. I'll start with a quick recap of the third quarter, we have revenue growth on a consolidated basis is 3.5%, net sales of 4.9 million have an increase of about 200,000 versus the prior year, broken up by our segments we had a 1.2% decline in wholesale, again as we talked about in our last call the back half here we expect to be somewhat softer versus prior year from a comparison perspective, due to the timing of launch of new products. Q3 of FY '16 actually on the domestic side of the business we had about a [indiscernible] increase in overall case shipments which was good.
However the net sales in the quarter were impacted by a decrease in our export cases primarily to Canada. You probably heard the theme on other calls that you know the Canadian dollar and exchange rate has made exports to Canada pretty tough from a category perspective and so you know we've really made the decision because it lowers our profitability and other things to really deemphasize the Canadian business during this period of time, and we're really working to just maintain our position and the true arc is probably where we fall in in Quebec and in Ontario. The direct to consumer increased 16.9% in the quarter for the direct consumer business continues to roll along strongly.
The overall gross margin percent decreased from 35% -- to 35% from 39%, the wholesale margins in the quarter were 7.4 margin points down. Last year in Q3 of FY '15 it was sort of the high point of gross margin as a percentage of net sales. So for comparison was somewhat difficult and that sequentially we did experience a decline. We had two particular skews that were strong sellers in the quarter that had lower margins and lower margins quarter over quarter as we sold through a higher cost production of those two items. Thus consumer 70 points, 70 points lower than the prior year again this was sort of within our expected kind of quarter to quarter sort of variance depending on mix there.
Operating expenses for the quarter certainly a highlight, 1.70 million was sort of decreased a 400,000 versus the prior year. So continue you know nice stability and cost management. On the next page we're capping the nine month period. Revenue growth a healthy 32.5% with net sales of just under $20 million which is an increase of about 4.9 million versus the prior year. 38.1% increase in the wholesale business. Again part of that comparison is benefited by [indiscernible] Paperboy that we bought from the prior year. Within a nine month period direct to consumer up 15.5%.
Overall gross margin percent was flat, the wholesale margin was 1.4 margin points higher for the nine month period, again the prior period was up by 16 was impacted by the Paperboy loss contingency and associated inventory impairment and then also in FY '16 we talked about earlier in the year, we did impair about $200,000 of California Winecraft inventory in this fiscal year. Direct consumer margin flat at 55% for the nine months.
On an operating expense perspective, we’re $6.2 million, which was negligible increase of about $100,000. G&A expense actually decreased about $200,000, and sales and marketing was about $200,000 over, which obviously drives a much better, for both percent from net sales ratio. So, we are seeing operating leverage that we have been discussing for a period of time here.
The next page, page 7, is the statement of operations recap, again, going from net sales down through operating income. What I just wanted to highlight is in FY15 through the nine months on a P&L basis, we’ve lost $1.2 million of this year through the nine months on an operating basis, positive $329,000 for fairly dramatic $1.5 million difference for the nine month period. So we’re feeling good about that performance for the nine months.
On the next page, page 8, again this is -- I’ve done this the last couple of quarters, recapping the reported numbers and adjusting for the impact of the Paperboy and California Winecraft impairment issues. You will see the adjusted growth of 27% for the nine month period on a consolidated basis, 31% as we talked about for wholesale, 16% for direct to consumer. And then on the gross margin side, consolidation of gross margin of about 34% after our adjustments for the nine months in 2016. Again, we’ve been talking about the consolidated margin for the Company in that mid-30 range. And again, we hope that -- and expect that we continue to focus on a comprehensive review of market by market pricing, and looking at our current cost as well as our expected for the 15 vintage will be 15 -- the actions that we’ve taken to get that wholesale margin going in the right direction.
Next page, again select balance sheet data, similar to format we’ve had. I’ll just call out a couple of things. About $2.3 million source of cash and inventories which is an expected closer than normal cycle of the year. As we step through -- step in the first quarter prior to what is -- could be fairly aggressive bottling and through the third and fourth quarters. So expect to see the inventory number go up from here a bit as we get things in the bottle prior to harvest. We see net debt from the end of FY15 through the end of the third quarter, it's been reduced about $2.1 million and net debt was $8.9 million at the end of the quarter. Sequentially, at the end of Q2, that number was $9,115,000, so again not a huge damp, but a continued decline in overall net debt. Discussions with the bank, they’re feeling very good about our overall lines of innovation and the churn and operating profit. So, they’re seeing the balance sheet and borrowing that is a lot more like they hoped.
So that’s go forward view of the finances. I’ll turn it over quickly to Phillip for a business update, Phil?
Thanks very much Paul. Nice job on the progress on the balance sheet, appreciate the efforts. As we’ve done in previous calls, I am going to give you an overview of what’s happening in the industry, and then just top two or three points. And then get into some specific items related to the Company.
So, in the industry some of you may have heard or know about that the 2015 harvest in California, primarily in the more premium regions like Mahogany, Napa, and Sonoma, experienced pretty dramatic reduction in crop size, some in our area were down as much as 75%. So it's having a fairly significant impact on the premium grade prices for the 2016 harvest. And we’re not sure about what the longer term impact is. Right now the grades through the vineyard are growing well and the crop size it looks, okay but it's still very early, we’re not too bloom in most areas. And so the jury is still out, and exactly what the crop size looks for 2016.
There has been some M&A activity in the premium and luxury segments in our business. You may have heard about the Prisoner deal that was done Prisoner is a high-end red blend that sells for in excess of $30 a bottle, and the reported sale price of that brand was about $285 million. And also some much smaller premium luxury tier brands like Patz & Hall have been sold recently as well. With the continued strengthened dollar, we continue to see great opportunities to bring wines in from around the country -- from around the world, primarily the Europe. We’ve seen some great opportunities, and we’ve talked about some of the launches that we’ve done. I’ll tell you a little bit more about the others.
Exports are difficult, as Paul mentioned, because of the strong dollar Canada primarily market has been particularly difficult as well. As it relate specifically to the Company, we’ve got in a new senior Vice President of Sales, his name is Jason Seeber. He just started at the beginning of this week with us. Jason has a very nice background with the foundation in wine stream. But what I think is the best training ground on the Walter Wine, which is Gallo and then we moved into this CPG companies, Pepsico-Frito-Lay and most recently was running a $200 million private label salty snack business with a company called Sears that has in excess of $1 billion in sales around the United States. So nice wine based foundation complemented by very-very strong private label business development and growth.
As we've done in the past couple of calls I'll give you some specific updates on our focus five customers. I'll start with Albertsons one of our largest customers, we've been working very-very closely with them and really focused right now primarily on chilling distribution boys of our products around the country. As the Albertsons and Safeway merger comes to a conclusion, now the regional managers are now coming on board to really evaluate those products and look where we have voids and simply them on your shelf which is a good opportunity for us.
We're also working on developing key national programs and regional programs to support our brands, we're really looking to get our brands on promotion, on display with the store numbers that Albertsons have can be very impactful on our business. Trader Joe's we're excited to say we recently launched a nice new brand with them called Kickbox, [indiscernible] region it’s just getting launched now as you probably know we've launched many new brands of Trader Joe's over the year and we're getting back on track with getting these two new products out with them, so we're excited to see what the future sales are of this brand and I'm hopeful that we'll find some other varieties to go into this brand as well.
Our strong New Zealand Sauvignon blanc brand called Sauvignon republic has seen some very nice growth recently, really fuelled by its entrance into the Fearless Flyer periodical that Trader Joe's puts out post the Fearless Flyer we saw nice lift during the time the Fearless Flyer and post the Fearless Flyer we continue to see some nice growth with that brand as well, and we're also looking to get some of our other brands featured in the Fearless Flyer. Total Wines and More, another very-very strong partner for us -- a number of sleeves with Total Wines and More, really done well over the years, now we're looking to really put some more fuel in the fire with those brands as well and looking at longer term promotional plans with Total.
So far one of our object brands Eden Ridge is going to be on promotion for the summer and California Square another one of our very big brands with them going to be on promotions during the [indiscernible]. So we look to build the base of sales for those two brands in Total Wines and More. We are looking at some new line extensions as well possibly for the end of this year and certainly for next calendar year.
And Target we have several programs in place that are kind of are more national brand everyday items that are on the shelf and we're looking for ongoing promotion and support for those brands going forward but the Republic of Wine program that's still relatively one now is about to launch its wage three items. We have two new items that are going to be launched on display with Target in July so coming up very shortly, very excited about that, certain that these brands are going to be launched significantly on display for us.
At Kroger we're working through the draft can inventory items and looking to focus on two skews that we have with them now, we are getting expansion of those skews into one of their banners in Southern California called Ralph's where we're looking at some potential whole blocks and distribution as well and also looking at distributor voids around the country that we can fill to keep that brand moving forward.
Colby Red our top marketing brand with Daryl Groom and his son Colby Groom showed solid growth in 2016, we're getting some nice imports from some of our anchor retailer there and we developed new promotions for Colby for the rest of this calendar year and certainly into next year; so a lot of work ahead but a nice solid base of business.
From here I'd like to turn it over to Christine to handle any questions and answers we have.
Thank you, Phil.
Operator we're ready for Q&A.
Thank you, we will now begin the question and answer session. [Operator Instructions] We do have a question from Ethan Starr, a private investor, please go ahead.
Good afternoon. I am curious you had any much success with the efforts to expand wholesale efforts beyond the top five private label customers.
You know Ethan -- thank you for the question. At the moment right now we're really just focused on those top five retailers they represent a significant number of sales in the United States and when we think our penetration opportunities are very high with them. So right now in the short term we're completely focused on them. There were certainly a number of other major U.S. retailers that make a lot of sense for us but that’s a little bit further out.
Any more comments on the harvest this year’s harvest or prices? Can you expand on that a little bit more or it didn’t too much, that nothing much else to say?
Not much more to say, really waiting for the grades to set the fruit, so we get a better idea of what the harvest for ‘16 would be. There is a lot of integration in grade right now, so I think it will be fine. We certainly have plenty of stock. We were very aggressive in 2014, which is a very strong year from a quality standpoint. So we’re all -- the Company is in good shape from the stock standpoint.
[Operator Instructions] I'm not seeing any further questions. So I'd like to turn the conference back over to Phillip Hurst for any closing remarks.
Thank you very much, Operator. I just have a couple of simple comments, as we do normally. First, as Ethan just talked about, harvest is on all of our minds as coming to say, the bloom for the grades. And we feel like we’re in a good shape with our contracts with the share of winemaker Virginia and very aggressive in the marketplace from a sourcing standpoint. So we feel like we are in very good shape. And we have good stock coming in from the 2014 vintage, which was a great quality year and good quantities as well.
Wine quality for us, something that we don’t talk about all the time, but is just extraordinarily important, remains very-very high, and I have a nice example for you all today. We recently submitted six Truett-Hurst's lines to Robert Parker, who is very important critic for around the world. And of the six wines, all six got 90 points or higher. So we’re very proud of the wine quality we have. And as we sell in new private labels and the new customers, bringing in 90-full points winemaker with us, so it's very, very important.
As I said several times we remain really, really focused on these top-five customers, really working closely with them to fill the distribution volumes. And their items are already listed in the stores. We have inventoried these items, and just filling the distributions with items already authorized is a great sale of opportunity for us; in addition to that working on the promotions, the displays that I mentioned earlier, certainly for the rest of the calendar year 2016 and beyond.
We’re really excited about the appointment of our new SVP of Sales and we’re looking forward to working with him and our customers just starting to go out there are now, and meet some of them and started to put our plans together. So, I'm very, very enthusiastic about that. So while we’re moving in the slower selling season for wine for the year. We have got a couple of nice new launches coming in, Target and Trade Joe’s that we’re very excited about. And the promotions for -- I covered it, November and December will be very important for us as well.
So, thank you all very much for joining the call today. Have a great day.
Thank you, sir. The conference has now concluded. Thank you for attending. You may now disconnect.
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