Q4 2019 Earnings Call
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Van Winkle from I see our please go ahead Sir.
Good morning, and thank you for joining new age beverages corporations 2019 fourth quarter in full year financial results Investor Conference call.
On today's call, we will have Brent.
Chief Executive Officer.
David Vanderveen, Chief operating officer, and Greg Cool Chief Financial Officer.
[music] like remind everyone that this conference call may contain forward looking statements.
Reflecting management's current expectations regarding future results of operations economic performance financial condition and achieve the company.
Forward looking statements specifically those concerning future performance are subject to certain risks and uncertainties.
Factors that could cause these results to differ materially are set forth in our annual report on 10 Kerry.
Filed with the FCC.
Any forward looking statements we make on this call are based on assumptions as of today and we undertake no obligation to update. These statements are the result to new information, but future events.
During this call we may present, both GAAP and non-GAAP financial measures.
Reconciliations from GAAP to non-GAAP measures is included in todays earnings press release, which is available under web site W. New age Dot com.
The transcript of today's conference call will be available in the company's website within the investors section at Www Dot new age Dot com.
I'd now like turn the call <unk> Chief Executive Officer.
Hey, Scott and thank you everyone for joining us on the call before we get into 2019 performance and our major activities in 2000.
And 20.
I want to share some overwriting perspectives on the company and our business.
We believe that we have a very good business and tremendous.
And unobstructed potential.
But to my first on the things that are virtually impossible to argue with.
We have a strong balance sheet.
Very little debt assets of north of 250 million and cash north of 60 million.
We have an infrastructure and 60 countries around the world.
And access to all those opportunities in growth and we only sell healthy products.
Those would be fulfilled by E commerce directly to consumers homes.
Let me reiterate that we own resell healthy products sent directly to People's homes.
No there are a lot of businesses in industries. It I'm not sure I would personally wanna be invested in right now, but I believe we are extremely fortunate to be in the business. We are in.
With that business model and channel access we have with what's going on in the world.
Because of how we have evolved because of what we have done.
And how we have built the company from.
Scratched three and a half years ago because of that we're up.
Worldwide year to date in 2020.
Yes, Oh.
And I'm not sure there that there are many businesses that can make the same claimed right now.
Consumers are nervous investors are nervous and it's understandable, but in that context, I believe new age has a responsibility.
Yes, we have an opportunity, but Moreover, a responsibility to live our mission to educate and inspire the planet to with healthy. It's why we created the company in the first place in living up to that mission.
Is that the most important now more than ever.
Greg Gould, our Chief Financial Officer is going to share 2018 operating performance with you in just a minute.
In fact, we transformed our business in 2019.
Growing nearly five times to a scale of more than 250 million.
That's one way to look at the business fairly.
On that Gail.
We now have a 60% gross margin, which is also a major transformation.
No I believe our institutional investors understand when you have that kind of growth that kinda transformation that kind of movement.
At that pace that it's virtually impossible to predict the forecast or project kinda performance.
With new business acquisitions at around five times.
The scale entity to lead guide direct manage your cross 60 different countries.
It has definitely been a moving target.
On the forecast for 2019, we did not expect.
The around 40 million revenue impact from the Chinese government actions on the industry.
Compared to our plan.
China had been growing at 20% a year for the prior five years. So it was reasonable to expect the seem to continue.
It didn't happen and no one predicted the impact that hit the industry.
Really right at the outset of 2018.
That is our gap versus what we initially envisioned.
Now in full transparency when you really dig into the numbers. The other gap is in the U.S. retail business.
Offset by growth in about 75% of our other markets.
We expect it more execution from 711, and Walmart on new distribution and they did not deliver.
And we expected more from the BW, our acquisition and they did not deliver either so that's why we are taking an impairment charge on the U.S. retail brands business.
Let me give you some additional insight on this too.
We started with some small brands three years ago.
And we have improve them overall, but.
Now they are no longer strategic.
We are just not going to invest anymore in them.
And in hindsight, we did the same at in bad when I was there we started off with some small businesses and brands in eastern Europe.
And as we grew and better opportunities emerge, we just sold them off the course.
Right now.
These small brands cost us a lot of money a lot of cash and they're just too.
Kind of heavy lifting versus the better opportunities better bigger brands and better more profitable channels. We now have.
In better and more profitable markets.
That's why we put them up for strategic review and we believe there is potential with a much better globally iconic brands. We now have like next tivo leak SVR in and easily but together so just to small.
And it is a disciplined approach to focus investment time money and effort behind what works and what is scalable.
I'm going ask our new Chief operating officer, David Vanderveen to talk about those things working in his outlook on the business and some of his major activities, but first let me ask Greg to take you through how we finished 2018 Greg.
Thank you Brett and good morning, everyone.
We had a true transformative in extremely busy year, integrating two acquisitions and increasing our scale five times to 253.7 million in net revenue in 2019.
While building the capabilities to me age of business across four different channels and 60 countries.
Some of which were under great pressure right away like Brent previously mentioned.
With the strategic review of the U.S. retail brands.
And now with our arms around what works and what does that we expected business to be less complex and much more manageable going forward.
In 2019, we generated 253.7 million of net revenue versus 52.2 million in the prior year a growth of 386%.
Gross profit was 152.7 million or 60.2% of net sales for 2019 compared to 9.3 million or 17.8% for 2018, which reflects the significant improvement in product portfolio.
Penetration of more profitable channels.
And access to new more profitable markets.
That's DNA in 2019 as a percentage of sales.
Was 6.6 points higher than 2018, as a result of a number of needed investments to upgrade and build out our platform, including upgrading external auditors to deloitte strengthening of the quality of our insurance in insurance providers.
Upgrading legal support to fakery drinker and Greenberg trial.
And important investments in the board of directors and the leadership team.
Net loss was 89.8 million or one dollar in 16 cents per share during 2019 compared to a net loss of 12.1 million or 26 cents per share in 2018.
The increase in net loss during 2019 was significantly impacted by the 44.9 million impairment charge for the write off of goodwill and intangibles taken during the year related to our U.S. retail brands business.
Adjusted EBIT improved by 1.7 million in 2019.
To a loss of 13.4 million from a loss of 15.2 million in the prior year.
Shifting to the balance sheet.
We continue to have a strong base and a clean capital structure.
Cash increased to 60.8 million versus 42.5 million in 2018, an increase of 43%.
Coal assets were 251.1 million compared to 158.9 million in liabilities at December 31st 2019, we had working capital of $33.5 million.
In the fourth quarter.
Ending December 30, Onest 2019, we had net revenue of 59.2 million compared to 14 million in the prior year quarter, an increase of 323%.
The company delivered gross profit of 32.2 million in the fourth quarter of 19 up 10 fold.
The 3.2 million in the fourth quarter of the prior year.
Total operating expenses were 97.7 million.
In the fourth quarter of 2019.
With the largest driver being the 44.9 million of noncash impairment charges for the write off of goodwill and intangibles taken during the quarter related to our U.S. retail brands business.
As Britain noted.
We have decided to look at our strategic alternatives with this portfolio of brands. The remainder of the increase in operating expenses predominantly reflects the increased scale in talent level of the team we are working with both internally and externally in the business Gerry.
2019, as compared to the same period in the prior year.
For the fourth quarter of 2019, we had a net loss of 65.9 million or 83 cents per share.
With the majority of the loss being noncash related to the goodwill intangible asset impairment.
Adjusted EBITDA for the fourth quarter of 2019 was a loss of 17.4 million versus a loss 8.7 million in the fourth quarter of the prior year.
It should be noted that the U.S. retail brands only represent 4% of our total revenue for fiscal 2019.
But created approximately 18.6 million in adjusted EBITDA loss.
Without the U.S. brands business in 2019, we would have generated 5.2 million up profit EBITDA for the year.
With us now looking at or strategic alternatives related to our U.S. retail brands business, we expect to see significant improvement in our overall profit and cash flow performance. Once these brands are eliminated from our portfolio.
On the operating side of the business.
We had a number of parts of the business that performed well throughout the year.
Our direct store distribution business was up all year long and continues to perform well.
For 2019.
The division was up 11% its 11th consecutive year growth.
All sectors of this division grew well, including their snacks alcoholic beverages.
In the largest unit non alcoholic beverages were number of new brands were added to the distribution portfolio.
In looking at Nnone by New age direct selling channel that used to be called Miranda.
In our first year of owning this business, we are cautiously optimistic on its trajectory.
Based on the Chinese government industry restrictions that occurred in 2019, we saw our revenue decline in China, nearly 40% year over year, which was actually much better than some of our competitors in China.
In 2019, only by new age grew in 38% of the markets, which we operate.
That growth was driven by Latin America, which was up 15% year over year led by Peru, with 24% revenue growth in 2019.
East Southeast Asia also contributed growth and was up 4%, most notably impacted by Indonesia, the world's fourth most populated nation, which was up 34.8% versus the prior year.
We did not grow in Japan, our largest market.
What we did do was reversed the rate of decline by almost half.
Which in in of itself is a major accomplishment.
As it is a market that has declined consistently for the last five years.
We expect improvements in 2020 based on the impact.
Some of our new products, such as Nnone plus CBD.
And to minus shape.
And the impact that day intervene, we'll have in helping us capitalize in this market in 2020.
I believe we have a strong direct selling and direct store distribution business with several high potential opportunities in front of us.
The balance sheet.
It pretty reasonable cash balance and manageable debt.
No one could have predicted the China impact in 2019 or is it continued decline in our U.S. retail branded business.
But we weathered it and now 2019 is behind us.
As we move forward, we focus on how to do well by doing good I.
Hi, doing this we are dedicated to improving the business.
Both operationally and financially, which would translate into a stronger growing business and increase value for shareholders.
Which we will do by delivering superior products to our customers that truly improve the quality of life.
We have started off 2020, well compared to 2019.
Despite the current Corona.
Pandemic.
The choices, we made to invest in marketing and operations and execution overall with the hiring of Julie garlic, our new.
CMO and David Vanderveen.
Including building out their teams are though right ones to leverage this profitable global platform, we have built.
We also believe it's the right thing to focus on.
This part of the business with the highest potential.
And it's a natural evolution to shutter those things that no longer our strategic.
And with that I'd like to pass the call over to David Our New Chief operating officer to provide visibility to the major drivers of our performance going forward David.
Thank you Greg.
Before I talk about the new age Omnichannel platform in what we're doing with it maybe I should answer question that a lot of people can asking recently why did I leave excess and damn way to join new age.
Why leave the largest business in direct selling for a much smaller player with proceeds challenges and risks why take such a big bet with my career, obviously I didn't need this I had a very successful good going with them way, though the leader in direct selling.
Who bought my access business, which is now in 60 countries with roughly 500 million and annual revenue.
So why joined new age.
I think the answer there's because I don't sit still very well and the world consumer goods is going through radical transformation right now.
The big fish doesn't always need the small fish anymore now the fast speech fast fish, it's the slow fish.
Many new age business investors know that I'm, an investor and advisors are it's three ventures, together with buyer and Ross Nate Robbie Aaron Rodgers and Glenn Rogers, who was formerly on my boarded access and that has since now join new age as the new head of business developments, we adopted a world view that traditional retail is broken.
I mean, you have to be there, but it doesn't it doesn't and can be you're only focus to succeed we know that healthy consumer brands, particularly in the emerging growth categories need to be heavily focused on direct to consumer growth or cross alternative channels like social and E commerce flagship experiences in store.
Catalog and even direct selling.
The point is that consumers need to be able to buy brands and products from a growing number points of presence when they want it and where they want it.
Much of my thinking in deciding what I wanted to do next was to find the right people people are always most important at a place where we could move fast and had resources to execute where we were committed to organic and sustained growth. We can explore serious omnichannel growth strategy and execution.
New age has already done the heavy lifting of building the platform and getting scale in a very very short period of time. So I think now it's time to leverage that platform and drive it like we mean its [laughter] and in my case drive it like I stole it.
That's what I've, a history of doing I like to drink life with two straws I'd like to move fast the team always gets the credit and I love to win with the team that delivers dramatic value for shareholders.
Bill Mcdonald from Cradle to Cradle, which is one of the best environmental design firms on Earth did a talk for a group of a part of Laguna Beach was talking about applied you're talking about applied values.
He said design signals intense.
What we I think Thats mean, what we build manners and how we integrate our values into the design of our business. Our brands are products and how we operate is what creates movements.
Also what we leave behind some brands and businesses can help people transform their lives and we want to do that new age. The team stands for educating inspiring the plan it to live healthy we do that was more than 280000 people in our extended system worldwide, we're constantly integrating those values into our daily decisions.
I'm very proud to be a part of that.
With the current health crisis in consumer demand for healthier products that they can consume and food beverage and supplementation.
Theres kind of know better time to be in our categories connected directly to consumers homes around the world.
It's hard to think through a better business to be leading growth in right now some industries just picked up an unexpected Gale force set of headwinds.
Really be difficult to manage and I feel deep empathy for friends and services or leisure or transportation industry.
The company in our strategic purpose is proving itself to be the right place the right time over and over.
Look new age has challenges I knew that going in however, I believe that the company has taken the right steps to focus on the best parts of the business and to eliminate the small parts, we don't need anymore.
Level of discipline encourage is not always easy to find.
This company move fast to acquire businesses and brands that allow them to.
Scale growing sustain themselves their speed and the level of execution as a team.
Was what appealed to me most and we're continuing to pivot and operate in a business that operates at a very high hiring speed almost like a high speed sport.
We've made significant progress in a very short period of time. The original businesses that we acquired were done to survive and to build something that was viable today all of the acquisitions were declining businesses. They were purchased at significant discounts, because that's what new which could afford a time.
And there was no different it had decline for 10 years was purchased for less than five times EBITDA and now it's just starting to rebound now we have something real value you have a global platform, we have the infrastructure the people the capabilities healthy brands.
We have direct to consumer E commerce in home delivery. After 12 months, we now have the direct selling side of the business going the right direction. We are offloading elements that burnt strategic anymore, given our path forward.
One potentially might not like or for better said understand the current business overhead the current SGN any related levels of profitability at.
This is just a point in time assessment, a data point and it's it's simply reflective of the fact that the platform has just been created.
Regardless I agree with the need for SGT leverage and faster profitability, but let's be clear we aren't focused on day trading the stock.
And we realized that the trajectory of real and sustained growth isn't the straight line up into the right. It's a journey like climbing any mountain that has a series of peaks and valleys keeping the ended mine constantly adjusting staying focused we will continue to reach new pinnacle's of growth and success.
So, let's let's talk about we're doing what we're doing right now to accelerate our path.
We're launching hot new products, we just started with CBD plus known in Japan, where I recently spent two weeks working with key distributors and our sales and marketing staff.
And we sold out of what we expect it would be two months of inventory.
It was an explosive launch and we were out of stock for a short period of time, we created great scarcity.
Japan is much bigger.
Then just the impact of launching a couple of new products. Our distributor leaders. There are now more excited than ever to see such a dramatic change in direction and a new portfolio of products. They can sell via new platforms, particularly social commerce mobile apps and experiences and events that attracted new generation.
In this industry indirect selling when your senior leaders are engaged motivated focused and excited about the business. It creates fresh when in your sales and you can run down wind.
So what are the big opportunities emerging in Japan, I think it's important to understand how the market works, it's not like the United States.
And breaking through the legal barrier in Japan to be able to just sell CBD beverages was the first big hurdle.
But it's also a little bit to edgy for the Japanese social norms, and customs will say call their law their social norms. They have they have a much smaller body of codifies law in Japan, we do but their social norms and standards control their actions and behavior is much more than other other places.
We have to breakthrough that too we have to break through the social customs and then the great thing is first movers in Japan would do that successfully you tend to endure in that pull position. So first we broke through with our direct selling business in that channel distribution and that has gotten attention now we're partnering with the most revered stem cell medical.
Network can do in Japan, using CBD for Postop recovery.
We're also breaking through on television.
With QVC, which will help with major retail distributors some of the largest retailers in Japan are asking to partner with us on CBD, because they want to be part of that fast moving trends, but they don't want to be the first we are legally and socially first in Japan. We will continue to lead from there. We are in a really historic position that we will leverage.
Beyond Japan, we're excited about the prospects for Tim on a shape, our new intermittent fasting product we plan to launch in 15 markets over the next 15 to 45 days.
In a minute fast things, where the hottest health and weight loss trends right now and we have smoothie pouches are made with Nnone income goocher that taste, great and on average our test subjects are losing 15 pounds in a month.
We just sold out of shape in North America last week on our first day of launch.
Also Julie garlic, Cogs, our CMO and I are bringing in a new ecommerce strategy in social selling tools and software to powerfully enable our field to make execution easier on them, we're transforming and improving our etail E Commerce and affiliate efforts by orders of magnitude.
To that and I encourage all of our investors to go to our new web site, which just launched today for our direct selling side of the business. It's at Www Dot Nnone, new age Dot Com, that's I know and.
Any W AG dot com.
On our corporate.
Since a corporate new age site, which is also updating.
But this one nani nnone new age Dot Com is is brand new of as of this morning, like I said and will encourage you to test the elegant and improve checkout.
If you if you type in the word immunity at checkout, you'll get a 20% discount special offer and free bought and if you're just interested in teach noni juice I'd be happy to send any any listening on the call today, a free bottle just send me an email.
David underscore vanderveen at new age dotcom.
The last driver I want to talk about today is immunity and it has a bigger potential value for us than all the other things. We're working on combined were carefully helping people understand and improve their immunity in general, but also with a host of new incentives to try some of the products that can uniquely help their bodies stay healthy right now we love the fact that all there.
Products are healthy, but two of them have been shown in human trials to increase People's immunity.
And do that significantly that's right proven they've been proven to strengthen people's immediately.
In addition, noni juice or T and Jay and sell defense or tubular products that are research patented tested trial proven and published to strengthen People's immunity systems in some cases by more than 30%.
The Polynesian to have been using to Houston Noni juice as traditional medicine for centuries, a number of scientific studies have recently been published about TMJ, particularly over the past decades through more into research partnership showing the boosting of bodily functions like NK cells, which are kind of the ammunition to kill viruses.
By as much as 32% and healthy adults, we have donated it to nine different hospitals in China, we are offering free trials to new consumers with incentives from distributors to share it for boost immunity.
And you can find a linked to the science and studies on our new website.
At Www Dot Nnone, new age dotcom.
The other products in their system that boost immunity is called enhanced sell defense.
It to his research patented tested trial proven in published to strengthen People's immune systems and it was developed in conjunction with the U.S. government.
It's not a cure, it's not a vaccine, but it's a powerful product it helps to boost people's immunity right now.
Sell defense is the way for people to take action right now and have more control of their health to better protect themselves beyond just washing their hands.
And more often you can self sequestering.
We've given it away to all of our employees and are working to make more frankly as much as weekend as fast as we can.
I didn't know about all this when I joined new age at beginning of the year.
I also didn't know that we'd be hit with this global business disruption in that so one of the most challenging health crisis is over time would be hitting its right now.
What I do know now is that new age has two products that can help people immediately and I'm, making it my personal mission to get the world out word out globally.
I understand that our situation at new age the challenges and opportunities and I knew those things going in.
We would be difficult I understood and understand.
Investors desire for faster financial progress and profitability I wanted to.
China was out of everyone's control in 2019, and now I believe we are a good position to outperform competitors.
And what matters. Most is that we have an outstanding platform that I I have a tremendous experience leveraging platforms like this and after my first 60 days, we're already starting to see results.
What we have in what I see and why Im here as an industry sector, whose time is right with a powerful range of healthy products, where exploding or the gates with some unique patented products.
I can really help people now I'm asking all of you to join Brent Greg or board. The rest of new age management team and me to unless your friends connections and followers to be a part of making a difference for this plan it with the southeast products, but more importantly for your communities families for yourself right now.
We can do it and we have the request your help in doing so and I invite you to join me as part of the cheap.
Brent.
Wow.
Thanks, Dave I hope.
All of our investors can see wide, Dave Vanderveen is probably the most respected leader in the direct selling industry.
I think we're incredibly fortunate to have him and let me tell you equally lucky to have Julie Gorilla Kovr, New CMO, who is just as capable.
75% of our management team is new in the past 15 months. So we're just coming together.
Dave talked about some of the strategic and operational projects. We are undertaking and he is leading and I would like to just frame, what Dave is leading and put those actions in context.
Strategically we are focused on three primary regions, North America, Japan and China.
Within those geographies, we're building out three platforms health and wellness.
Healthy appearance and nutritional performance and we're working to build $100 million brands within each one of those platforms.
He shouldn't Tony is already won.
And Tim on a is on its way into healthy appearance platform.
We will continue to differentiate our brands with healthy function appointed difference utilizing nnone across the board.
Plant based ingredients.
CVD and Fido nutrients from our health Sciences patents.
And in terms of consumer benefits were focusing on immunity prediction and reduced information, where we have the science to prove the patent the studies the human trials to expand our relevance with consumers.
We have grown.
Truly over 100 times in the past three plus years following a roadmap that we laid out at the very beginning of our journey.
Our roadmap for the next three years has the same mission.
Greg talked about it doing well by doing good.
But getting there looks much more focused.
In much more precise in how and where.
And what and when we execute to get there, but we are absolutely confident we will get there and in the process drive tremendous return for our shareholders.
Getting that incremental scale is technically financially very important to us as all the new revenue from this point forward.
Has significantly less SNA attached to it so roughly 40% of gross margin can flow directly to net income.
Operationally I'm very pleased with our fast start to the year, especially in the context of the global business disruption being up in Japan, our largest market is not an accident.
The Tim on a launch in Japan was our first new product launch there in 10 years, and we are working rapidly to expand our business in other channels there.
And not just through T mall, and we chat.
90, plus CBD is another excellent third and Tim on a shape our interim in fasting single Sears single serve smoothies is launching now and just the first quarter much more to come.
In our third focus market North America as one might expect our DSD Division has again started off strong.
And we continue to add new.
Consumer must have brands in their three product sectors.
But positively also we have gained some important new distribution a nasty in certain cosco regions and with Walmart nationally.
Like everyone else, we're selling all the water, we can produce and distribute in the short term that as previously mentioned, we are only going to focus on the products with the most potential in that division.
With a clear ability to profitably scale.
I do expect some short term business disruption and difficulties to operate it's just impossible impossible to predict how and where it might impact us.
Our biggest market is up and.
And we have a tremendous pipeline of activities and products that we are implementing in Japan, and frankly around the world and Dave and Julie in their teams have had immediate impact and expect that to continue.
As Dave and Greg mentioned.
Online ordered direct delivered to your home business.
Structurally is pretty fortuitous right now.
Through that we're delivering healthy products that everyone needs.
And expect you'll see a lot on strengthening immunity and how our tieszen nnone and enhance sell defense products directly help.
And we'll help consumers and you'll see more information on that from us coming over the next quarter.
We are being very careful with it because even though we have the products that work, we will not be opportunistic and frankly, we just want to provide solutions has good citizens at a time when its needed the most and with that I think I'll pass it back to the operator and opening up the question.
Thank you as a reminder to ask a question you want me to press Star one on your telephone switch all your question press the pound cake. Our first question comes from David Bain of Roth Capital. Your line is open.
Great. Thank you very helpful color you had a lot about my questions in advance of acuity, but if I could guidance first.
I understand what the significant kind of unforeseen disruption in China in the first half with the cooling impact from the industry view and then seventyth anniversary in the fourth quarter, but.
On your stated one cute growth worldwide and just based on what you see today, but the news with the virus with the current trends and the strategies that.
You guys outlined is it fair to say that you think you're going to see overall organic growth is here.
I would take David spread here. Thanks for the question I would say that we are comfortable.
Right now with the full year consensus guidance.
In both the top and bottom line.
But as you pointed out it is a very fluid situation and I'm not sure of all of the business impacts, but you know the fact that we started off the year.
Growth.
Overall and growth in our largest markets is a very good start I don't think many people can say that so you know we're comfortable on a full year basis I do think think that there'll be some fluctuations.
On a quarter to quarter basis, but.
A year work, we're comfortable with the consensus estimates that are that are out there and with all the new products that we're doing with the new people in like Dave talked about the leverage of this platform we've created.
We're set up for a good year, but it depends on the global level of business disruption, that's just impossible to predict.
Sure. Okay, and then so that was helpful. As long and can you discuss overall I PC growth or revenue per IP to maybe last year in the fourth quarter, Dave you mentioned multiple products and programs.
But you've implemented to kind of grow both can you give us any data points on reception at this point or is it or is it just too early and then guys can I just think there's a multi prong final question I know you touched on this brand Dave but.
That's fair do you think in some ways direct selling is becoming a more popular way to sell products and the current environment. Given that's like one on one no gatherings, especially now you are anchored by a new products and then finally virus mitigating techniques for ITC, such as Sky telephonic sales or anything to think about there.
Hello level.
That's a good that's good question Brent your answer some of that you would it take that.
Yeah, you got it all 'cause it's three pronged in a very difficult questions.
[laughter].
Okay. That's it all.
It's again, it's a great question I think it's something that we're at in the middle of.
So.
I'll give you a couple of examples I've been kind of focused on market by market.
Not as much in aggregate.
We are seeing.
Significant growth.
And not just in per I, PC, but more importantly, we're seeing a lot of our senior leaders, who had kind of become disengaged in some markets because like Brent had talked about orinda had been a declining business, which is not good indirect so he really need to maintain growth to keep everyone excited and participating.
We're seeing a lot of senior leadership Reengage in big ways, and really kind of recommit and come back you put a lot of effort in.
Particularly our biggest markets.
In North America in China, Japan, and our North American market.
One of them better numbers I saw in China was that they were hit by the krona virus early and our our Q1 numbers. We were seeing is particularly in February where there were at quarantining. We were seeing this almost the same number of new distributors coming into our business as previous year.
Which is a testament I think to your second question, which is you know what.
What's.
This is direct selling become more route relevant.
The Chinese government that despite the entire industry to big disservice by putting 100 days moratorium.
On the on the business rather than just calling out that actors.
I had problems in the market, where some Chinese companies were.
Over promising in ways that were very damaging to consumers, particularly.
Some young children, where there are cancer claims and the pull people off.
Told people off chemo to give them supplements rather than actual medicine Anda and had.
Negative impacts and some of those people into the government crack down in the whole industry.
We weren't one of those bad actors, but we were all impacted by now we're coming out of that.
But I think what we're seeing is that when people are at home and when people can't travel and when kept people can't really go to their offices and work.
They're finding alternative ways to benefit and traditionally when there's a big downturn in the economy.
Healthy direct sellers do really well, it's usually an opera. It's a time when people are looking for other opportunities and they're willing to do things maybe they didn't want to do it if they were living in healthcare economic times. So that's all really healthy.
As we saw in our Japanese business, you know, we sold out of a hot new product category.
After our our key monthly sales day, we have a lot of subscribers that going into 15. So you saw a big bump an incremental revenue in Japan.
Because of some of that hot new engagement because of the the peer to peer communication that occurs.
And I think if you looked at to your last question and Japan's had a down economy for you know for 20 years, but if you if you build that into your last question about new technology.
What we've been implementing since June sincerely garlic off came on and myself.
Our number of new technologies, she just revamped our entire website, where in the middle of deploying a mobile app.
Called Skylab.
Really allows to it really helps take people on a journey and automates and game advised the process of either a customer journey and affiliate journey or one of our distributor journey. So that they kind of know what to do day by day recognizes rewards them and gives them.
Badges and ranking so that they are encouraged to change behaviors.
And add new habits their life.
But we're also doing we're implementing and we have implemented zoo meetings in the past and we're scaling that much more aggressively.
One of the things we're doing right now as we're actually having more meetings than we used to have.
Because because we have a focus now on doing it virtually and that's having we believe in impact on a business and creating some scarcity on our immunity products, which were ramping up production to continue to fulfill through what's obviously a difficult time.
And we're also working to get the story out about the benefits of our products, particularly around immunity in a way that we're being very careful about not being opportunistic or not over promise, saying, but giving people a lot of value around immunity right now all the different things you can be doing.
And the way that a couple of our products can really help people hopefully stay healthy during what is proving to be a difficult health crisis right.
Okay very helpful color. Thank you.
Thank you.
And then next question comes from Aaron Gray of Alliance Global Partners. Your line is open.
Thanks for the questions and David welcome to the team.
So Brent just an initial question on on the impairment and the shift away from brands certainly makes sense just given it looks like the new age segment had had negative gross profit dollars of past couple of quarters, but Jeff first of all I just think about the DSD business are there any synergies potentially be loss or impacted.
As you kind of move away from the Bank branch business and then also just in terms of potentially selling off some of those brand names certainly there are some with some brand equity and them such as you know copel Libra, some wage you're looking to potentially monetize those are any expectation there. Thank you.
Great question here and I'm going to ask Greg to help me on it to first off on the synergy side on the DSD side of the business I mean, the biggest potential negative synergy might be in zing from a revenue standpoint, but again it wouldn't be a negative synergy from a profit standpoint, it'd probably be good.
And whats happened again, I mean, I hate to keep bringing up China with what they did in the on the industry in China in 2019 kind of their global gift to the world in 2020, but the whole tariffs situation significantly increased the cost of raw and packaging materials in 2019 that.
You know basically significantly impacted glass and aluminum and negatively impacted the profit of these brands. So you know they were always negative but now they are just a drag on us versus the other opportunities. We have so there maybe a little bit of negative revenue synergy, but not negative profit.
Impact as it relates to the DSD Division and I would say overall you know you've got about 80 brands in that.
Group and about 700 800 different SK use and.
They were up 11% I don't know many.
Direct store distribution businesses that in 2019 were up 11% and they're continuing to just crush it right. So that there's a lot of expansion potential for that.
In terms of divesting those businesses, you're right here and there is value in them because they've got distribution they've got sales Theyve got revenue and.
Just in the rate hands of people that can focus on them and want to focus on them.
On a smaller portfolio it may make sense for them. So there may be some value there but.
It's all upside from this point given how we've treated it financially so.
See what happened we've already started the process literally.
More than 30 days ago or amount. So we're progressing that anything else, Greg, Yes, Big thing I'd really throw in there.
No.
We still see that retail brands can be a key part of our business and really a key part of.
Of the business moving forward the problem is that in the retail market you need to have brands that are that are very well known and brands that that are very large and then we really see that we need to put them across.
Both retail as well as well as Etail, and then even going out and getting halo brands and putting them through our direct to consumer model. So then by doing that.
Altogether, you really do get a omnichannel market and that's where we really see the growth coming but but pace you need to do that with very well known very iconic brands, which now we think we we have with more of the nest teas.
Involve Ics.
The world compared to some of our older smaller brands that we had originally bought so suffice it just like rents at their industrial acquisition right Yeah.
Basically the short term, we might see a minor downtick in revenue by base, we think we'd see a very large uptick in in profitability and and the.
Process of selling off some of these small brands.
I think they make a lot of sense in the hands.
Have a much smaller.
Entrepreneurial type of company, you know and using the same way. We did originally had something to get a base and really get moving.
But basis, now where we sit today I mean.
We're a quarter billion dollar company six different countries and assist high for us to take that next to happen and it's better for the company and our shareholders. If we focus on some more high potential brands.
And more high potential selling with a direct to consumer so that's where we're moving now I think Greg said it perfectly in beautifully I couldn't have set it better.
Myself.
And I would just reiterate we like the retail sector, we like traditional retail sector.
But just not with the older smaller brands that we started with so when we look at the company, we want omni channel going forward and want to compete in each one of the channels you just have to do it in the right way with the right scale and particularly in traditional retail even if you look at some of the best brands like over the past.
10 years like by to come nine years to get to just over $100 million and they were sold with a 400 million dollar loss carry forwards. So you need to have access to retail, but we want to do it in the write profitable way in there. It's just as Dave Vanderveen talked about just better and more profitable.
At more channels in markets that we now have access to and makes sense for us to double down on those especially with what's going on in the global economy, So, but we like traditional retail but in the right balance I would say.
Hi, great. Thanks, that's really helpful.
And then just diving a little bit deeper just into quarter to date, certainly appreciate not wind to give specific guidance on 2020, just given all the uncertainty.
But you mentioned before you know you're up year to date. So far so just any type of goalpost you can provide in terms of we expect revenues come in first quarter. I think you did 58 million last year, So fair to think.
Lastly above that.
I think about that and then any specific color that you can buy in terms of specific countries, such as China, and Japan, I think Japan, you implied that it's also up year to date.
And where do you expect those turned the corner.
Yes. This is Greg and basically we can say.
This call since.
We meet all Reg FD that.
So far what we've seen in the first quarter is that throughout the.
First two months in revenue, we are just very slightly above where we were last year.
But with the March.
We still continue to see good thing.
But basically it's difficult because it seems like each day when they come into work I'm seeing less and less traffic, yes and.
So.
Where we sit today is that through February we are slightly up compared to last year and and basically we are very cautious about march but but we feel like we are definitely in the right market delivering healthy products directly to the consumers' homes. So that we feel like we.
We are very good alternative for a lot of customers out there to really help build their immune system and really live healthier and better life.
When I add to that I think that's right were up and we expect to be up versus prior year in Q1, the bigger picture for me, though is the full year basis.
Gain.
Vanderveen and Julie are just starting to hit their stride.
The launch of Nnone, plus CBD in Japan that came on a skincare launch in China.
The came on a shape intermittent fasting product that we're launching and some other really powerful things in the queue. We think are really going to drive the business coupled with new leaders joining the business plus the economic situation that.
Could have a positive impact on our network. So that's what we said on a full year basis.
We're confident in both top and bottom line.
That will have some.
Differences on a quarter to quarter basis, and that's just too hard to predict but.
Look we've got the platform and we've really got the right people in the leadership team that that knows how to drive these things Julie I mean was at Radian and fields is one of the key marketing leaders there and David just the machine. So he knows exactly what to do when to do and how to do and the.
Statement in our company, even with what's going on the World is palpable and I wish I could share that with all of our investors but.
We I just I feel lucky to be in this position with the channels in the E commerce and everything that we've gotten and yes, Dave I want to ask you if you wouldn't mind piling on.
You know kind of what you see from a from a growth standpoint for the company.
Thanks, but yeah I mean, the the opportunity right now is too.
You know is too.
A lot of value two communities concerned about their health and to attract people who are worried about your finances and there just isn't.
It's it's not what we wish for but it's it's it's the reality that we have and so this is the time when the direct selling segment of our business can really run and.
Fortunately, we've been working pretty aggressively since I came in in January and Julie before that too dramatically overhaul that E commerce part of the business.
And and also get some of these new tools like ours, or mobile App, and which will really help game apply the business for people coming in remotely in particular, a lot of lot of tools are using like zoom, and we chat and different social tools for communication just makes it easier for us to execute and for.
Our distributors who are older.
Given that as well I brought some relationships with me.
And one of them, we have great new social media team. That's a just overhauled Oliver social platforms is doing training now with a lot of our older leaders to help them quickly.
Bill skills to be successful on.
Some of those newer.
Newer social selling platforms that people need to know and so we just we just seen great results is a lot of excitement a lot of activity.
I was just I was surprised to see China do that well.
This february versus previous year.
Given the impact of the CRO to virus on that marketing they were right in the middle of particularly Koubei Woburn you were right in the middle of a lot of the big issues in February with corn teens.
And.
We continue to see good things happening there so.
It's going to be a bit of an ugly girl downs, but I think we're going to be the least ugly girl and some of these some of these global Pandemics right now and.
I think we'll.
Well look relatively positive given though.
Thanks for the color that I was really helpful. And then just one last one if I could.
Just as I think about the path to profitability.
We know we look at the fourth quarter it looks like SGN eight ticked up sequentially about 30% or just under 8 million.
So gross margin came down I would just over 300 basis points and I think even if you exclude.
The impact from brands I knew wage been so still down just for Miranda so and in that all kind of led into.
The negative EBITDA that kind of worsened sequentially, but sounds like you're going to get back towards you know that path to profitability as you kind of.
12 off the brands business, which should certainly help but how best overall think about you know the SNA, we'll look to pick up and gross margin unit returning to.
Enhancement and as we kind of get Theres any type of timeline you guys are kind of aiming towards the when you get to breakeven or any kind of color there would be helpful. Thanks.
Hi, Greg, Yes, it's Greg so so basis during the fourth quarter. When we took the impairments. We also had a really look at some of our inventory we had in those channels.
So then we did take a little bit of a extra hit there you know when we look at the company going forward, we think that we should have.
Gross profit somewhere.
Closer to the mid Sixtys.
And that's something we think we can make.
Maintain this year it did come down.
Based upon some a write off we had but we think we have those behind US now and then once you look at the SC USA.
We did take a fairly conservative look at it here as of 12 31, which.
Which basically had some effect, but a big thing about our current SNA. We we've built the company now so that we can scale in scale significant lead probably of into three or four times. The size. We are today without having to make a lot of additional SNA.
Additions, we feel like we have a very good team onboard that.
We can continue to add in a couple more people that basis theres not going to be a lot of extra.
Extra cost going through that even as we fully scaled to.
Much bigger size. So overall, we had hoped that.
Not.
Sometime within the not too far out future, we should get our SNA down to.
The low to mid 30.
Percent range.
And I'm, just going to add to what Greg said, So if you think about a 65%.
Gross margin commissions, which for this kind of businesses really fairly fixed at 29% to 30%.
And then SGN a the more we drive that number down that's where the real leverages. The he is exactly right in terms of the PNM structure and the closer we push that down to 30 them or.
Free cash flow, we generate so that's why scale is so important and in all CPG businesses, but we're now at that point, where you're almost at the cases that you add from this point forward and the revenue add from this point forward is the gold and revenue Golden cases, because the significantly greater portion of the gross margin drops to the bought.
Some line because you don't need incremental SG any commission stay the same at 30%, 29% to 30%, but our goal would be get that get that as she in a down to the low thirtys percent as a net sales. Because then you can you can you can see how the cash really drives in the business.
Great. Thanks Best of luck in 2020.
Thanks.
Thank you and our next question comes from Mike Ryan Daws, North Northland Securities. Your line is open.
Yes. Thank you.
Could you guys talk about.
Just quickly, which brand you're exiting and which ones are going to stay.
Yes, Mike is branch here, we're looking at it now but.
For sure Coca leaves gray Aspen pure including its its manufacturing businesses.
And potentially depending on the price, we get for them and the interest.
Some of the other traditional retail brands that we started with.
That being said, we like some of the globally iconic brands nasty Ili coffee.
Coca Cola had these brands and they had scale in them. So we think that they're quite scalable and and good brands.
As is full veeco and and beyond but all of their brands aside from those globally iconic brands.
We're open to.
Divesting. So we can focus on the big winners and continue to look for other big scale winners in that sector. So again.
We like retail, but in the right context, but you know any and all of those other smaller brands that we started with but for sure Coca leaf Gray given what's happened with a coconut water segment overall, aspen pure and potentially some of the other brands to but for sure those two.
Got it so the only three that are core going forward, our heavy on healy involving did I hear that right.
And next team.
Okay.
Potentially potentially Boucher end Marley.
We'll see.
And they really need to be scalable and outside the United States. There is especially in Japan, there's a lot of interest in Marley.
And and relevance, especially with Marley plus CBD, but you know as everybody knows we've been curtailed from doing that in North America. We felt we had the biggest potential but.
We're open but there's there's a few for sure that we're going to divest, but you've got to be disciplined in this stuff too because as Greg said overall, it's like 4% of our revenue and and we want the profit we want the cash because.
The right disciplined thing to invest that profit invest that cash in what's going to double and triple the size and scale of the business.
Got it in you said earlier, Brent 711 in Walmart did not deliver.
Why do you think those channels.
I think it's a combination of that then and us right. So.
With 711, we launched boots.
And.
The that channel in that particular customer really just wasn't ready for a come due to kind of product. We had initially seeing great movement for boots.
In seven elevens and in convenience stores around college campuses up in Canada.
But when they brought it to the United States. You know 711 is fairly challenge because more than half of their businesses our franchise.
At the half of their outlets are franchised and just because you know 711 puts it in the global plan a gram doesn't mean any of the franchisees put it there. So we didn't get any of the distribution.
We got very negligible parts of the distribution and then to get the distribution you got to pay more money with the.
The fios sees and.
More money to do merchandising on a store by store basis, and it just becomes really and profitable if they can't just get the product and get it on the shelves in the right way, which 711 wasn't able to do and if you've got.
A team of less than 30 salespeople, even if you go get merchandisers and those kinds of things. It just becomes too expensive. So that's kind of 711 and same with Walmart, we didnt get all the retail distribution, we're looking for and there's always a big lag between authorization and distribution right.
Getting it into the stores, but a couple of SK use of Martin we might say in in a couple of the key clusters.
And is not enough to have presence and technically presence is what correlates to preference or kind of daily drinkers and.
And real consistent sales when it gets part of consumers repertoire, you just didnt get enough preference so.
There are still potential for my pay that's a real winner within that whole portfolio, but.
Those guys didn't execute and when you know when you get net Ti for example in like Costco in Walmart, that's really the right kind of consistent product because consumers you used to buying those kinds of products and those kinds of channel. So.
Net t., we think is a much better opportunity there than some of the old new age kind of emerging brands just trying to break through and in what is frankly huge see of confusion at traditional retail right now.
Got it.
Just one more.
It looks like a filing came out a half an hour 45 minutes ago.
And I don't know if it's related to the ATM or not or an update because they haven't read it great detail, but it doesnt look like.
A new credit facility requires you to maintain roughly 15 million of.
Cash.
And it talks about 15 million needed to be of new equity needed to be raised by June and then the 30 million by year end could you guys just kind of explain that are.
At a high level, what's going on there.
Yes, they see it's it's our same line of credit and term loan we have with the East West Bank. We just went out and reset some of our covenants for 2000.
20, and 21 and basically with that.
We needed to.
We have the cash in both China as well as here and basically.
Until once we hit certain EBITDA covenants, we need to keep that.
As as restricted cash with the them.
The majority of it isn't China compared to here. So that we have more access to it and can use it within the U.S., where we can see faster growth. We think so thats just part of that same east west loan.
And then with that.
As a as an equity cure to EBITDA, if we need.
Yes, and then as equity cure to EBITDA, we would raise.
$15 million before June 30.
Of which we we've already raised 6 million in January. So then we'd have another 9 million to go at some point here within the next four five months.
Well, that's if we need it Mike versus just driving the performance of the business, which is our primary focus then.
So far so good on the performance of the business and we expect more that to continue so if we don't have to do it and if we don't have to raise any equity we don't want to.
Yes.
Okay in the 30 million in total by year end Thats, what only if your EBIT Dotcoms up short is is that what you're saying.
Yes, that's the way it works is that.
Well, what we've consistently raise cash throughout the last four five years. So then I would guarantee our I went to guarantee but basically there is a very high likelihood that.
At some point during this year, we will go out and raise some additional capital, especially when when we continue to look at different opportunities as we move forward. So surveys to that falls in line with where we're at.
Base It made sense for us to made make these adjustments to our loan.
At this point and this is just a exhibit to the 10-K so.
That's okay, okay. Thanks for that clarity.
Thanks, Mike I think we're a little bit out of time, everybody, but I wanted to thank everybody for joining us on the call today and and we appreciate your alignment to the vision of what we're doing it the company I do think we're in a good position with our E commerce and our home delivery and.
The strain on global economic situations that could spur more people coming into our system.
Participating in looking for additional sources of revenue, so and we like the portfolio that we and with these healthy products.
So thank you again for joining us and we would continue conversations.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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