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Castle Brands, Inc. (NYSEMKT:ROX)

F4Q08 (Qtr End 03/31/08) Earnings Call

June 30, 2008 4:30 pm ET

Executives

Kathleen Heaney – ICR Inc.

Donald L. Marsh, Jr. - President and Chief Operating Officer

Alfred Small – Chief Financial Officer

Analysts

Julie Welter - Piper Jaffray

Ted Brown – Private Investor

Jeffrey Morrison – Private Investor

Operator

Good day and welcome everyone to today’s conference call entitled Castle Brands Inc. Fourth Quarter 2008. Today’s call is being recorded. At this time for opening remarks and introductions I would like to turn the program over to Ms. Kathleen Heaney.

Kathleen Heaney

Thank you. Good afternoon everyone. Making presentations during the call today will be Don Marsh, President and Chief Operating Officer, and Alfred Small, Chief Financial Officer.

Before we start I would like to remind you that this afternoon’s conference call contains forward-looking statements based on management’s current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company’s ability to control or predict and you should not place undue reliance on any of the forward-looking statements. The company undertakes no obligation to update any of these statements whether due to new information, future events, or otherwise. I also remind you that certain significant risk factors, with regard to the business and the company, are described in more detail in the most recent Form 10-K and other public documents filed with the SEC. The company’s Form 10-K will be filed by the close of business today, June 30, 2008, in accordance with SEC rules and regulations.

During this call management will discuss EBITDA, which is a non-GAAP financial measure. We define EBITDA as net loss before interest, taxes depreciation, and amortization, including amortization of stock-based compensation expense and after the recognition of the impact of the 40% minority interest of the Gosling Castle Partners Joint Venture. While it is not comparable to net loss, management feels that EBITDA is an operational measure which better provides for a basis of year-over-year company performance, as it approximates the fundamental earnings power of the company’s operations by eliminating non-operating and non-cash expenses. We have provided a reconciliation from net loss to EBITDA, as defined above, on the Castle Brand’s website.

During this call management will also be discussing case sales and depletions as operational measures. Unless otherwise specifically noted, all references by management to case sales refer to nine liter equivalent cases, the industry’s standard measurement of a case.

I would now like to turn the call over to Don Marsh, President and Chief Operating Officer.

Donald L. Marsh, Jr.

Thank you, Kathleen. Good afternoon everyone. I am pleased to welcome you to the Castle Brand’s conference call to review the company’s fourth quarter and fiscal year end 2008 results.

The past six months have been a period of transition for Castle Brands, as we restructured parts of the business with the ultimate goal of improving distribution of our products and achieving profitability. As we discussed on our conference call last quarter, we have been working diligently on lowering costs to acquire time and to build confidence in the market.

We continue to focus on these initiatives and for the past six months have been working on repositioning the company and its product portfolio. As previously disclosed, we have hired an investment banking firm to help us in this process. We continue to focus on our brand development strategy and believe that with a combination of cost-cutting efforts and continued brand development we will achieve profitability.

To give you some idea of the cost-cutting initiatives we have undertaken, I will highlight a few: We have reduced inventory levels across the board; we have disposed of obsolete and slow-moving inventory; we have intensified the collection of our receivables; we have restructured the working relationship with the Goslings Castle Partnership subsidiary; and changed our distribution relationships in the key markets of New York and Florida for Goslings.

In addition, we have restructured our distribution relationships in the U.K. and in Ireland. We have reduced headcount in all locations, and we’ve implemented tighter internal expenditure policies.

Lastly, and most importantly, as a distinct phase of this work, we’ve undertaken a major review of the supply and value chains for all brands, with the intention of removing all non-essential costs from the fulfillment system of the company. Our goal is to take the necessary steps to achieve profitability while, at the same time, continue developing our business.

Boru remains our strongest brand in volumetric terms and it continues to be important for us. Boru now has a significant footprint in the market place. As a result, we can now focus more on profitability and less on volume growth. With our established success with the Boru brand, we are shifting our marketing focus to higher margin brands such as Pallini Limoncello, Goslings Rum, and our whiskeys. We continue to expand our marketing program and add distribution channels for the Pallini and Goslings brands. The Goslings brand has also benefited from the restructuring and increased marketing emphasis.

On the distribution side, we continue to add new accounts. Some key new wins include, for Pallini, during the quarter we added Cosco in the East and Midwest regions. Along with Boru, Pallini is being featured at 30 Marriott properties this summer. In the case of Goslings, it has become Hyatt’s feature brand for the summer of 2008. It is also benefiting from a full listing at Ralph’s supermarkets in California, after a successful launch there in the fourth quarter.

Our growth strategy for the company is a combination of organic growth, the creation of new brands, and proprietary agency agreements. And we will look to add more of these. Overall, the changes that we are implementing with our brand development strategy are working, and I believe we are well positioned to leverage the groundwork that has been laid to date.

Now let me explain why. In the past we have focused primarily on case sales, but as I mentioned last quarter, we now have the ability, through the use of external service providers, to obtain information on the depletion of our products from our distributors to the retail level. We believe that depletions are a more accurate indicator of the overall health of our business. As a reminder, depletions are shipments from wholesale distributors to retail customers and are commonly regarded in the industry as an approximate measure of consumer demand.

During the fourth quarter our brands exhibited continued momentum on a depletion basis. The U.S. showed strong growth, as measured by depletions, finishing up 16% in quarter four. We saw strength across most of the portfolio. The Jefferson’s Bourbon is benefiting from new listings in North Carolina, New Hampshire, and Ohio. Boru continues to stimulate growth in both take-away and retail availability. Brady’s Irish Cream continues to grow in its core Northeast markets and it is now being served at Mohican Sun, the large casino in Connecticut. Clontarf is also following a strong growth path in the Irish Whiskey category. These depletion statistics give us confidence in the continued momentum of our business.

We are focusing our overall marketing efforts to target each brand in each market segment. Our on-premise initiative with our partners at the firm of Next Level continues to perform well. Some other key marketing initiatives undertaken during the year included: The creation of Tierras, our new tequila; [and] the expansion of our bourbon business through the discovery and acquisition of rare 17-year old stocks.

We introduced new packaging and a new marketing campaign for the Clontarf Irish Whiskey brand. You can find this ad at www.clontarfwhiskey.com. The redesign of the packaging is intended to bring together symbols that reflect both the quality of Clontarf Irish Whiskey and its heritage.

At the prestigious 2007 World Beverage Competition, Castle Brands brought home six awards in four categories. Our flagship brand, Boru Vodka, sponsored the 2008 tour of Lloyd Dobler Effect, the winning band in Boru’s Defend the Bar Band competition. Boru Vodka was awarded first place in two categories in the 23rd Annual Beverage Dynamics Advertising and Promotion Awards. The brand was recognized for the best advertising, promotion, packaging, and merchandising materials in the beverage alcohol industry. Boru Vodka’s new packaging was also relaunched in the United Kingdom and we also engaged United Brands, a leading distributor in the United Kingdom, to distribute Boru in the U.K.

Before I turn the call over to Al to review the financials, let me quickly review some of the key actions we took throughout the year. We restructured operations in Ireland and the U.K. to reduce losses with limited impact to operations. In this instance I will add that the restructuring in Ireland will be transitioning into the first quarter of fiscal 2009 and we expect that to result in a continuation of reduced case sales in that market. Our brands will be marketed in the remaining European and other international markets primarily by third parties. Management has determined that the utilization of external vendors and/or agency agreements is a more efficient and cost-effective means to sell and promote the company’s products in these regions.

We hired a seasoned industry executive, John Glover, to head our global marketing initiatives and commercial development of all Castle’s brands. On June 10 we announced that we are seeking strategic alternatives to grow the company and that we have hired an investment bank to assist us in these efforts. At this time we have no comment on any specific alternatives but we expect that the initatives we are undertaking will improve our overall performance. Our products are performing well and we have numerous initiatives in place to improve revenue.

In summary, we have intensified our efforts to manage the organization more efficiently, to lower costs, and to improve earnings. With that, I will turn the call over to our Chief Financial Officer, Alfred Small, who will discuss certain financial results of our fourth fiscal quarter and the year.

Alfred Small

Thank you, Don, and good afternoon everyone. Our total volume of case sales in the quarter was 71,246 cases, a decrease of 1.6% from the 2007 fourth quarter case sales, 72,395. For the year case sales were 313,288 cases, reflecting a slight decrease from the 314,644 cases recorded in 2007. The slight decline in case sales in the quarter and the year were largely due to a re-launch of Boru Vodka in the U.S. and the U.K. as reorders were held back awaiting the new bottle launch, as well as the restructuring of our distribution arrangements in Ireland and the U.K. This latter restructuring is ongoing as we speak.

The fourth quarter of 2008 net sales increased 5% to $6.4 million compared to $6.1 million in the comparable period of fiscal 2007. For the full year sales were $27.3 million, in improvement of 8.6% over last years sales of $25.2 million.

As discussed on previous calls, we began taking price increases across certain of our products and markets as part of our overall pricing strategy. While our net sales reflect the initial effects of some of these increases in dollar terms, our overall case shipments for the quarter and the year were negatively impacted by a number of factors, including the changes in distributors in key international markets and the timing of certain purchases in the U.S. and international markets.

We believe that the price increases we have implemented to date have been positively received by our customers. The growth in U.S. depletions, which is tracking at near 32% for the year, is a clear indication of this and continues to be a very good sign of both the health of our brands and our successful position within the premium end of the market.

The reported gross profit margin for the fourth quarter of fiscal 2008 decreased to 27.1% from 33.4% for the fourth quarter of fiscal 2007. This is due to a combination of higher packaging costs as well as a weaker U.S. dollar impacting our overseas operations.

Rebalancing our portfolio is an important initiative that we have undertaken. During the third quarter we wrote off obsolete product inventory and in the fourth quarter we took the opportunity to write off obsolete point of sale inventory. Consequently, we booked an expense of $400,000 which negatively impacted our selling costs. As a result, total selling expenses for the quarter were $4.2 million, in increase of 6% from $3.9 million for the comparable quarter in 2007. Excluding this allowance, selling costs would have been $3.8 million for the quarter. The 2008 year selling expenses increased to $17.8 million as compared to $16.8 million reported for the 2007 year. The increase in selling expenses primarily was attributable to higher personnel to support our marketing efforts, or improve marketing efforts, as well as the previously mentioned write-off of obsolete POS inventory.

General and administrative expenses were lower for the quarter compared to the comparable prior year period. For the year G&A increased 2.4% to $8.4 million from the $8.6 million reported in 2007. As a percentage of net sales, general and administrative expenses decreased to 34.0% for the fourth quarter of fiscal 2008 as compared to 39.7% for the comparable period in fiscal 2007.

As a result of the various write-offs previously discussed and an impairment of good will of $8.8 million, our net loss for fiscal 2008 was ($27.6) million, a change of 66% over last year’s net loss of ($16.6) million. EBITDA loss for the year was ($15.2) million as compared to EBITDA loss of ($12.9) million in 2007.

With that, I will turn the call back over to Don for some closing remarks before we open the call for Q&A.

Donald L. Marsh, Jr.

Thank you, Al.

We continue to evolve our strong portfolio of brands and position the company’s products within the premium segments of the spirits industry. I want to re-emphasize that we are refocusing the company on profitability rather than on case sales. This will improve the overall health of the business over time. We continue to intensify our efforts in this regard and have already made progress on several key initiatives. I am confident that we will be successful in this process and we look forward to updating you about our continued momentum on upcoming calls.

That concludes our formal remarks for the call. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Julie Welter with Piper Jaffray.

Julie Welter - Piper Jaffray

I just have a quick question on the Clontarf Irish Whiskey packaging. When did you launch that and how many markets is it in and then did you take price?

Donald L. Marsh, Jr.

Well, Julie, we’ll start that from the back. We have not taken substantial price increases in Clontarf Irish Whiskey. The brand is healthy, the brand is selling, it’s got a very nice and attractive profit margin associated with it.

And the packaging change was designed, as I said earlier, to emphasize the quality and the character of the product, as opposed to a re-launch, if you will. So there was no price increase of any material amount taken with that.

The re-launch occurred during the first calendar quarter of this year. We got the package into the States just prior to St. Patrick’s Day. We didn’t get a lot of sale because it was just prior to St. Patrick’s Day but it’s been in the market now since March and being received very well.

Julie Welter - Piper Jaffray

It’s national?

Alfred Small

Yes. And international. We also launched in the international markets.

Operator

Your next question comes from Ted Brown, private investor.

Ted Brown – Private Investor

I am a private investor and I have been involved in the past with Mark Andrews American Exploration Company, etc., etc. Now, I know very well the resources and the knowledge that Mark has amassed over the years and that his contacts are very strong and wonderful and that he knows a whole lot of stuff that maybe some of these investment bankers don’t. So I am completely confused by the fact that the stock is in the pennies, that it has lost all of its luster, that you’re spending money on an investment banking operation that you probably know what to do your own selves.

I’m sorry to be so perplexed, but I am, and I wish you would talk to me a little bit about what I had to say.

Donald L. Marsh, Jr.

Well, Mr. Brown, I’m not sure what to say. Mark Andrews remains as Chairman of the Board of the company and has voted affirmatively for all of the changes that have taken place, in particular with respect to the engagement of an investment banker to assist us. The company, as you may know from having followed it, has lost considerable money over the course of the last few years and beyond that. And so the Board of Directors undertook a change in the direction of the company.

I would be happy to talk to you further about it off line, but I don’t think this is the place to discuss it any further.

Operator

Your next question comes from Jeffrey Morrison, private investor.

Jeffrey Morrison – Private Investor

Can y’all explain some of the bourbon that you purchased that you mentioned from 1991, maybe the source, and the quality?

Donald L. Marsh, Jr.

I can’t name the source because it actually is a very confidential piece of information. But I can simply say that, as you may know, bourbon stocks are in short supply and in the course of our searching for general supplies of bourbon to satisfy the specific recipes and tolerances that we have identified for our Jefferson’s and Jefferson’s Reserve brands, we happened to come across a stock of bourbon that whose owner hadn’t realized he owned. And we negotiated for that and so we wound up acquiring, just recently, a seventeen-year-old stock of what we consider to be the finest bourbon in the world. And that will be, hopefully, coming onto market within the next two quarters.

Operator

And with no questions standing by, I would like to turn the program back to Mr. Marsh for any closing remarks.

Donald L. Marsh, Jr.

Thank you, Millicent, and thank you for helping us with this call. Again, thank all of you for joining us today. We look forward to updating you at the end of next quarter and we appreciate your continued support of Castle Brands. Good luck to all.

Operator

This concludes today’s conference call. You may now disconnect.

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