New Age Beverages Corporation (OTCPK:NBEV) Q3 2016 Earnings Conference Call November 15, 2016 11:00 AM ET
Scott Biddick - IR, Scott Biddick with Amato and Partners
Brent Willis - Chief Executive Officer
Chuck Ence - Chief Financial Officer
Good morning and thank you for joining New Age Beverage Corporation’s quarterly results investor conference call for the period ending September 30, 2016. I am Scott Biddick with Amato and Partners, the new investor relations partner of the firm. I’d like to welcome you all to the call today and to thank you all for joining.
On today’s call we will have Brent Willis, Chief Executive Officer of New Age Beverages, and Chuck Ence, Chief Financial Officer.
On our call, Brent will provide some opening comments. Chuck will provide an overview of our third quarter 2016 results and then turn it back to Brent who will discuss operating performance in the quarter, and progress against major priorities. We will then open the call to questions.
We remind you that this conference call contains 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.
The transcript of today’s conference call will be available on the Company's website, within the investor section at www.mybucha.com. I’d now like to turn the call over to Brent.
On June 30, 2016, the last day of the second quarter we were able to complete the acquisition of…. and merger with…. the XingTea and New Age group. Frankly we did it in record time, executing it in less than 45 days – start to finish. We took a loss making, $2 and a half million dollar company…and acquired a firm 20 times its size…that was profitable…and frankly, we did it with very little dilution for shareholders…and…we did it financed through US Bank with a blended interest rate of 3.7%.
With a transaction that sounds that good, there is usually a ‘too good to be true” clause in there somewhere. In fairness, there was a measure of limited information out there, exacerbated by the fact that accounting rules did not permit viewing a consolidated P&L in Q2. As a result, many of the pundits did not believe in the Company and the nBev stock. So the visibility from this quarter is particularly important…as it should frankly silence any logical previous or future disbelievers.
Q2 for shareholders was a great quarter for nBev shareholders. By anyone’s account, a lot happened, major transformational moves. On our last conference call at the end of Q2, we listed our top 10 accomplishments for the quarter. Since that time, we are happy to report…a lot has happened, again. Here’s our top 10 for this quarter.
One, We grew our topline gross revenue by 10%, surpassing our expectations and achieving our highest recorded gross revenue in history, reaching $15,765,968; two, all brands and all Division’s delivered excellent growth, Xing, New Age, Aspen Pure, and Bucha. Our Bucha Live Kombucha led the way with 40.2% growth versus prior year. 40.2% on one of our flagship priority healthy functional brands; three, some companies fallaciously chase revenue at the expense of everything else, especially profit, in faint hopes of a buy out some day. We think…we know, that that is a false and antiquated paradigm. So on top of our highest recorded revenue in history, we also delivered $ 446,205, in EBITDA. Imagine that – a profitable company in the beverage industry, funding its own growth.
Four, We delivered the EBITDA, despite numerous one time costs associated with the acquisition, integration, audit, and multiple other one time costs that exceeded $175 thousand. So operationally, we are running a very tight, cash generative business; five, we delivered the revenue and profit, despite the distractions typically associated with an integration. We shut down operations in California… done, we integrated into our new Corporate headquarters in Denver and completed the audit of the merged entity check …done. We focused and integrated the new team eliminating overlapping headcount and ……all of which were new experiences for the team; six, in Opex and cost synergies we are just beginning to see the benefits of the combination. In freight and transportation, we have improved the expense to 4.5% of net sales vs. more than 11% historically for Bucha, Inc. as a standalone company. We eliminated 90% of the headcount from Bucha, such that our personnel expense is now 12.2% of net sales, in improvement of 1.7 basis points, and we are just getting started in addressing overall opex improvement.
Seven, We expanded internationally and increased sales with major distribution partners in the quarter in Chile, the Caribbean, and others. We are just getting started here, but see tremendous potential in ’17; eight, we expanded distribution, adding more than 2,000 new accounts in the quarter across the portfolio. As part of this, because we can ship our Bucha Live Kombucha brand via ambient, non-refrigerated distribution, we also were able to expand to two major distributors, Hensley Beverage Company in Arizona and surrounding states, and Heralambos in California. We have not reported on these two major impacts before as just signing an agreement is one thing, actually putting products on the trucks and selling them, is quite another – and we have made the commitment not to talk about things until after they are real, and after we have already executed them; nine, we began R&D development on three fronts. One, improving our COGS sold on our existing products, 2) the developing new healthy functional beverage products, that we expect will be a redefinition of the segment, and 3) both 1 and 2 materially contributing to the bottom line. Yes, those are aggressive statements – but we have a lot of confidence in the new, truly new, products coming in the pipeline; and ten, in culture – we have implemented the new performance based compensation, the new operating values, and as a result we are beginning to gain the focus and commitment in the newly combined organization. Some of you may think that culture development and progress is just a nice to have, but trust me from experience, it is the most important thing as it leads to long-term, superior, sustainable, profitable results.
One more thing, that actually happened at the beginning of the fourth quarter. In mid October, we came to agreement with the Marley Beverage Company to integrate the Sales, Marketing and Distribution arms of the Companies. We will talk more about this later, but we have a lot of optimism in what we can do for the benefit of both New Age, and the Marley Beverage Company, as a result of the incremental scale and relevance with retailer and distributor partners.
Now before we get into the details that and all of our operational results, I’d like to first take a moment of silence in respect for our former CFO Bob Miranda, who passed away last month after a valiant battle with cancer.
Bob was a great executive and a great guy. He will be missed.
For the Company, we were prepared with a more than capable leader to take his place, a testament to a good organization. And with that, I’d like to ask Chuck Ence, our new Chief Financial Officer to review the quarter’s results.
Thanks Brent and congratulations on a tremendous first quarter as a combined public company. I am particularly pleased because I get to be an integral part of leading it, and am particularly interested because as part of the acquisition, I took 100% stock in the deal along with the founders Scott and Tom LeBon, so we are very focused on and vested in doing whatever we have to do to be successful and drive shareholder value.
Now, let me take you into the details of the 2016 third quarter financial results. Let me just put things in context for you so you can frame where we are. For the past four or five years New Age and Xing was essentially ‘stuck’ with virtually no investment, limited resources to capture the growth in the growth categories in which we compete, and as a result limited growth. So in the past quarter…to add the scale, add the growth, eliminate the previous significant expensive debt, and to add the opportunities we now have in front of us, is ….a material change in our trajectory.
For the third quarter 2016, Consolidated gross revenue achieved $15,767,898 versus $14,393,966 in the prior year. Subtracting discounts and billbacks, at the net revenue level the group achieved $13,482,012 for the three months ending September 2016 vs. $12,312,370 in the prior year, representing a 10% growth on an apples to apples basis. Reported in our 10Q for last quarter however… was only $611 thousand for Búcha, Inc. That is the technical accounting comparison, but the proforma comparison versus prior year reflects excellent net revenue growth at 10% above prior year.
All Divisions and brands showed excellent growth during the quarter, led by the Búcha Live Kombucha brand that was up 40.2% versus prior year. Driving much of the growth on both Búcha and all the brands for that matter, was good execution by the national sales team in expanding distribution whereby they secured more than 1,500 new outlets, and two major DSD distributors on top of that, and The New Age DSD group added another 500 outlets alone in their own captive accounts that they cover.
In our Q2 conference call, Brent signaled that we had momentum going into Q3. We had the early visibility on what was coming, and we told all our investors we had momentum, …and we still have it.
Looking at the rest of the P&L, gross profit increased to 21.8% of net sales showing sequential improvement versus 21.4% in the second quarter. Supporting the gross profit percentage was the improvement in freight whereby we improved from 11.2% of net sales in Q3 of 2015 to 4.5% of net sales this quarter, and we see more improvement to come. Overall COGS improvement takes longer, but key action plans have been emplaced to gain some quick wins, and we have begun to action longer term, more major impacts. We know we can make significant improvement in COGS and expect to make more than 10 basis point improvements over the next few years.
In operating expenses, we held them flat vs. prior year on an absolute basis, and with the growth in revenue this lead to a reduction in headcount expense to 12.2% of net revenue, down from 14.2% in the prior year, and a reduction in total expenses to 19.7% of revenue, an improvement of 1.7 basis points vs. prior year.
The excellent revenue growth of 10% coupled with good cost control throughout the P&L led to EBITDA in the quarter of $446,205 versus $202,527 in the third quarter of 2015, a growth of 120%. We are so pleased with this result for four main reasons:
1) It is an outcome of both excellent work from the sales team on driving profitable topline growth, and the entire organization in keeping costs and expenses ratcheted tight.
2) It was achieved despite all the work in integration of the companies, and all the distractions that those things typically represent. Investors have seen this movie many times before, and heard the excuses many times before. …But, it is a real testament to the group, that it focused on what was important, delivered at both the top and bottom lines, and integrated the companies for an even stronger platform going forward at the same time.
3) The profit result was achieved despite more than $175,000 in one-time, non recurring investments including the costs associated with the merger, the audit of the XingTea/New Age Company as part of the acquisition process, legal and other fees – that on an adjusted EDITDA basis had us at $621,205 for the quarter;
4) It puts us in a different league vs. our beverage peer group. Of the 8 public beverage companies we compare ourselves too, only three are profitable, and we are one of them, despite the fact that we currently trade at more than a 500% discount to the average of the peer group. Yes, one of the three profitable players, yet trading at more than a 500% discount to the average.
In summary, looking at the financial performance for Q3 2016, there are a few important components I’d respectfully hope you takeaway: One, topline revenue grew 10%. Not many CPG companies of this scale are growing at this pace, and our growth was led by the Bucha live Kombucha brand that was up 40.2% in the quarter. A great example of healthy functional beverage growth with one of our flagship brands. Two, all Brands grew and all Divisions grew, showing good momentum going into the 4th quarter. Three, Operating Expenses were tightly maintained and were flat with prior, leading to significant improvement as a percent of sales
Four, the acquisition of XingTea/New Age…and funding of the acquisition is complete, and was done in record time. The Total equity cost to shareholders was only 4.3 million shares, and it just does not get any better. Five, And finally, the company is focused on capturing synergies and improving our gross margins. We have begun capturing the synergies and the tougher, longer term ones are now in our sights.
For me, this is exciting to be part of, and frankly witness such an impressive transformation. I spent the past 13 years as part of Xing/New Age and now, literally in a few months our trajectory and momentum have fundamentally changed. The company is moving very quickly and its prospects for superior… sustainable…and profitable growth…. look very attractive.
And with that I’d like to pass it back over to Brent to give you some more insight into the operational details of the quarter.
Thank you Chuck.
The numbers are good, the fundamentals are getting stronger, our brands are performing, our sales force is focused and motivated, our retailer and distributor partners are happy and seeing good growth in our brands, our costs are controlled, the culture is starting off in the right way.
New Age’s performance is not by happenstance. It is no accident. We have a clear roadmap, and we are executing it, and we are following up and measuring what matters. Let’s face it, in May/June the Company was $2.5MM in revenue and losing money, by July it was north of $50MM, by the end of Q3 through organic growth, its north of a sixty million dollar annual run rate, and now with the Marley Brands, its around $70MM. Two and a half million to around $70MM ….and profitable in 5 months’ time…. is one thing. It is a fact.
On top of the financial results at the topline, we believe we are building something powerful…and special. Why?
1) We have a very healthy balance sheet, with a low level of debt, a very low interest rate on that debt, and a very clean cap structure with no warrants and 21.9MM shares outstanding. So – its not just a good company, it's a good stock and the two things are not always aligned.
2) By our measures, we are now the 11th largest healthy functional beverage company in the world. 5 years ago…we were not even on the map…and we also made the list of the top 60 non-alcoholic beverage firms in the world, coming in at number 57, given the recent purchase of Whitewave by Danone.
3) We are in 10 countries ….really just a starting point, but this quarter we strengthened our presence in Chile and the Caribbean with expanded sales, and we expect international to be a major growth driver for us in 2017.
4) The 4th and final reason for the belief system is we are building the tenets of sustainable competitive advantage with strong brands…in the growth segments of the broader beverage industry….with a great distribution network of aligned partners, with new marketing and consumer connection abilities, a solid infrastructure and set of organizational capabilities, and a focused, metric driven, performance oriented team.
Our brands are solid – and we believe they fall into the better for you category vs. their respective competitors. In RTD Tea, XingTea is the number one ranked tasting tea in the North America out of 250. Number one, not top ten, not top 5, number one. It has no high fructose corn syrup, no GMO’s, and no preservatives. Retailers are taking action against some of our pre-priced, lower-quality competitors with lower margin for retailers, and we are beginning to see the benefits of the shifts to higher quality, better for you offerings in RTD Tea, and XingTea is in a good position to capitalize on this.
In Kombucha, the segment is the fastest growing in the US in the beverage industry. Our number one market for our Bucha live Kombucha brand is actually Georgia, so this is a category going mainstream, and retailers are gravitating towards Bucha as it is the most mainstream in taste profile of all the Kombuchas. Frankly, we care less about the Kombucha purists of the past, and we care more about winning with the next 50 million consumers choosing healthier functional beverage options vs. their previous choices.
In Premium Bottled Water this is an exploding segment, and we believe we have an untapped brand opportunity in Aspen Pure. It is perfectly PH balanced, artesian sourced water from the Colorado Rockies, and we are excited to build this “US Fiji” water equivalent with all of the natural imagery and purity that Aspen represents.
And now we have competitive entrants into Relaxation drinks and RTD Coffee. Relaxation beverages is a new segment but with Marley Mellow Mood, we have a great entrant to build the segment. In RTD Coffee, the category is exploding as has been reported in the broad industry press. Yes, there is a small competitor out of Seattle in the segment, and other Coffee brands coming in next year, but we have a foothold already, we a fantastic tasting range of products, new flavors coming in 2017, and we have an icon in Bob Marley with over 70million Facebook followers that gives the company a globally relevant brand on which we expect to do a lot in 2017.
That’s what we have. Now, what is it that we are doing? The answer is, nothing different than what we have been doing – just executing, executing, executing on the few things that matter:
Our focus will continue to be on 5 priorities:
1) Merging Organizations and Infrastructures and now also merging the sales, marketing and distribution forces of the Marley beverage company. Are we adding complexity, sure, but the benefits of scale, additional sales resources, a great marketing team addition, a broader national retailer and distributor footprint, and penetration to new growth categories, far outweighs the incremental work.
2) Capturing Cost and Revenue Synergies. We are ahead of our schedule on both the cost and revenue side and see no impediments to delivering the $7.5 million in benefit over the next 12 to 18 months as previously committed.
3) Driving organic growth via distribution and gaining what we call pervasive availability – especially with Key Accounts….and beginning to penetrate international in close in markets. Health and Wellness are not US trends – they are global – and because of these tectonic shifts in consumption – it represents a real opportunity for companies like us that are not anchored with a big carbonated soft drink footprint for example, to capitalize on these trends.
4) Broadening our DSD operations with an expanded portfolio. With the Marley brands, Some of our Hispanic brands and new routes, and our just credibility as the leading independent DSD operator in the Market we expect to see continued good growth from continued good distribution and in-store merchandising execution.
5) Building our brands with high ROI consumer connection activities and in-store activation, and leading…leading with the next generation of healthy functional beverages.
And finally, building our organizational capabilities, culture, and improving our margins, through continued good cost control, improvement in our COGS, and installing Zero Based Budgeting on all OPEX which we are implementing for 2017.
Our focus…it is not complicated. We have a clear roadmap, a clear plan, clear focus and accountabilities, and …clearly it is working. We have the organizational capabilities and an aligned and focused team, we have the brands in growth categories, we have the benefit of swimming with the tide with retailer and consumer fundamental shifts, we have the distribution, we have the sales and marketing team and capabilities, we have the scale, we have the profitability, we have the plans and such low-hanging fruit with national accounts and international markets, and we have a stock that today trades at a significant more than to the average of our peer group. So, we have a great short-term opportunity for shareholders and we believe an even better long term one, and most importantly, we have the experience and the people and are building the culture to create something extraordinary.
We have simply gone from 2.5 million to a run rate now of around 70 million in about 5 months time…and we are not stopping the train, as we have the motivation to create the worlds largest healthy functional beverage company, and make a difference for consumers by providing healthier alternatives.
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