Q2 2021 Newage Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the new age second quarter 2021 earnings conference call on you.
A reminder, all participants are in listen only mode and the country. It does look quite and after the presentation, there will be and opportunity to ask the question to join the question. You May Press Star then 1 of them on the telephone keypad should you need assistance during the conference call you may signal on the I'll break down by pressing star.
Zero I would now like to turn the conference of Red, Kevin Madden and Chief Financial Officer. Please go ahead.
Good afternoon, and thank you for joining new age of inks 2021 second quarter Investor Conference call I am Kevin and I joined New age on July 19th as the Chief Financial Officer.
I am very pleased to be with you today and will be joined by Brent Willis, Our Chief Executive Officer on.
On today's call Brent is going to provide an overview of the operations and progress against our strategic initiatives and then I will provide a summary of our financial performance before we open it up to analyst questions.
I'd like to remind everyone that this conference call may contain 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.
Factors that could cause these results to differ materially are set forth and our annual report on form 10-K, and 10-Q filed with the SEC and.
Any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.
During this call we may present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, and 10-Q, which are available on our website at new age Dot com.
I'd now like to turn the call over the Brent Willis, our Chief Executive Officer.
Thanks, Kevin.
And we are pleased with our top middle and.
And bottom line performance, our third consecutive quarter of positive EBITDA.
To remind everyone that was our commitment.
But once we got the scale, we would achieve positive EBITDA.
Now the next commitment will be positive operating income and free cash flow and we believe we have the scale and the right structure and infrastructure to deliver that and.
And we will deliver as we work through the noise of our integration and synergy pass through and frankly, a number of moving parts and 1 time expenses that we do not expect to be and recurring.
And within the quarter, our acquisitions and integrations of Rx and alive and continue to proceed on schedule and financially on track.
Actually above our expectations and commitment to deliver $20 million in synergies.
The leaders of all of the different businesses from Rx to noni to remove Tuesday, Noah to our newest partner company alive and in Japan have now integrated and most of the markets.
Co located offices.
Eliminated redundancies and maybe most importantly, combined websites and systems compensation plans and other activities.
We hope of our Investor partners understand that this is a massive and very difficult process and set of activities to integrate.
But to do it and the first 6 months of the acquisition is.
I would say laudable.
And gives us the right foundation, especially system the foundation to announce the springboard to the next level.
Our refreshed website is now live along with the consolidated Commission system, which is unique to our industry and it allows for our brand partners to earn commission for their efforts based on a 1 of the kind multi line payment structure I'd like to thank our team for the long hours involved.
All of the to facilitate the integration.
And also pre thank them for the subsequent hours that I know are going to be coming but the challenges that are always of rise post consolidation.
Now as the companies combine and we strength and all of our organizational capabilities. We have added Kevin Mannion, as our new Chief Financial Officer, and cutting Casso Reinhart as our chief people officer.
These 2 leaders and my view, our best in class and their respective functions and importantly have of the bandwidth to lead their groups.
To become the major multinational that we are on track to become and.
Now, Kevin and Kadena embodiment of our shared service team the wood.
Span all of the current and future operating companies and business units I.
I do want to mention as an aside.
But our current senior leadership team is more than 50% women military or of minorities.
This is reflective of our commitment to diversity inclusion and opportunity.
Overall company female representation.
Is out of 47% rate and amongst our brand partners is above 70% of many of whom are fellow shareholders. We are committed.
2 ensuring our company provides opportunities for everyone.
And every corner office of the company.
And in every corner of the world.
Building on this area I believe it is a good time to remind you of what new age stands for and the operating values and principles that.
And that new age is committed to number 1.
We go big.
And endeavored to change the world with healthy products, driving wealth and sharing the wealth with all of that contribute to our success and number 2.
We never compromise and what we stand for.
And how we operate with integrity of above reproach and.
And in what we do with no compromises ever and the quality efficacy and the health of our products integrating the best of both science and nature.
Number 3.
We share ownership and owners fellow owners focus on what matters and deliver no matter what.
And before we are accountable, we are metric driven and disciplined and we do what we say we are going to do and finally number 5.
We live and family.
Our building and inclusive culture that embraces diversity and invite others willing to aligned to our purpose and embody our culture.
It'd be part of this special company, we are creating.
We believe that and the long run.
Culture Trumps strategy every time.
Although we are in the first inning of our company and the first inning of building a high performance culture.
We have the leadership team to build it and.
And the additions of World class executives, like Kevin and cutting and adding to the others. We already had internally puts us in a very strong position now that's the how our values and our culture now.
Now to the what.
With our strategy.
Healthy science backed functionally differentiated brands.
Delivered and a direct to consumer distribution system that we call D to C.
Aggregating a global team of brand partner really Influencers.
Enabled with the leading social selling tech and the industry on.
The brand partners are our competitive advantage and so on trend with what is driving consumers purchase behaviors. These days.
Over 72% of our revenue is derived from E Commerce auto ship orders from our website and more than 85 per cent of our orders are delivered directly to customers around the world correlating to more than 500000 drop shipments direct to consumers' homes.
Every single month, and what we call our direct to consumer D to C business model.
So our model and even at this early stage is really working and beginning to unfold and we are beginning to be recognized for it.
New age was awarded as the most innovative company of the year by the coveted Goldman and bridge business and Innovation Awards. Other winners included I B M and.
And walters' Cui worse. So we are in good company there and.
And 1 of our new products, the Houston Noni Super fruit wellness shocks was selected as product of the year.
We received additional accolades from both the Forty-second Telly awards and the Irma as Creative awards 2 internationally renowned institutions that recognize the new age for our digital direct to consumer and social media marketing.
These wins represent of our dedication.
And to providing our brand partners and Influencers with World class content.
Assets and tools to drive their businesses.
And relevant media execution for millennials and Gen Z consumers that frankly now comprise more than 50% of the global population.
And I'd also added this fortuitous time with the Summer Olympics, taking place.
We are proud to announce the 33 of our and nutritional products.
33 of them have been included on the globally renowned global Cologne list, which is the worlds premier anti doping testing organization the.
Cologne list was initially developed out of the study sponsored by the IOC The International Olympic Committee to help protect athletes and having an athlete's council comprised of World class athletes, we have the responsibility.
The understand the impact of substances can have on them every step of our product development process meets or exceeds their rigorous testing standards and our inclusion on the Cologne list and Germany demonstrates the quality safety and efficacy.
Of our approach and our premier products and speaking of of trusted resource. We're also excited to report that our children's chewable vitamin neutral 5 kids.
Has been included.
In the physician's desk reference on.
And also referred to as the prescribing digital reference that now exists solely on line I am so proud of and the team.
With the credibility we are gaining.
And again, we're just getting started with our portfolio of the PDR. This physician's desk reference is by far the most widely trusted and use directory of the ethical pharmaceutical and biological products published for the medical field know medical reference is more of.
Respected or recognized all of these new products.
All of them marketing and other initiatives are driving top line growth, but overall and in the quarter.
Is that 98% versus prior year.
As reported.
We were up significantly in Europe, and the U S.
Both regions contributing attractive double digit growth.
Our focus however is to continue to make improvements and the EBITDA margin to this and we are working on capturing synergies and.
And importantly, ensuring that they translate to the bottom line.
Further reducing our SG&A that Kevin will review and at the same time, improving our gross margin.
We recently announced the sale of our United States production.
Actually just in the office and filling facility to T. C. I of Taiwan based public company and the World class manufacturer.
We are aligned with TCA to improve our cost of goods sold by up to 20% and the next few years.
And also through the transaction, we were able to reduce almost $1 billion in annual administrative costs.
And we'll also receive $3.5 billion and cash and a share of the revenue from PCI over the next 5 years. So this is just an incredible deal for both new age and T. G I.
In addition to the financial benefits for both parties.
We both get the focus on what we do best.
And in the case of new age we intend to continue to focus on what we can be best in the world that.
And if we can't be best and the world at it we will outsource it.
We have a lot more actions underway to improve cost of goods sold and this is just 1 of them.
And our strategic plan period over the next 3 years, we expect to approach, 75% and gross margin and we have the roadmap in place to get there.
Look.
And the middle of this now and then Nick our costs and shipping and supply chain and are under pressure as it is top line growth, but we are proving.
Zillion tea and top middle and the bottom lines of the business growing our top line.
By adding more brand partners, expanding our social selling tools and e-commerce subscribers strengthening our middle lines, both at the cost of goods sold level and SG&A and.
And translating it to the bottom line results with consistently improving profitability and with that I will pass it over to Kevin to review the details of the quarterly financial performance Kevin.
Yeah.
Thank you Brent and good afternoon from our global World headquarters in Denver, Colorado, I'll start by discussing our financial results for the second quarter, followed by comments on our balance sheet.
Please note that all comparisons are year over year, unless otherwise noted we will also be discussing non-GAAP results and a reconciliation of non-GAAP financial measures is included in our earnings release and 10-Q.
On a consolidated basis second quarter revenue was 124 million compared to $68 million, which is a 98% increase over last year.
This was primarily driven by the acquisitions of Rx and alive, and which we completed late in the quarter.
These acquisitions indicate our continued commitment to our social selling network and our direct to consumer route to market strategy.
Last year's revenue also included $3 million from the retail brands business, which was sold in Q3 last year.
On a regional pro forma basis, our largest market, which is Europe grew 24%.
It is the states, which is our second largest market increased 15%.
The pro forma increases were offset by declines in China and Japan.
The decrease in Japan was further impacted by the local government imposed moratorium and recruiting new brand partners, which will be lifted the September.
The current and continuing impact of Covid remains of negative impact on all of our markets.
And also on a pro forma basis FX rates benefited revenue by $3.9 million, mostly in China and the EU.
Gross profit increased from 38 million to 8.4 million, primarily due to the organic growth margin enhancement activities and the additions of Rx and alive and.
Overall gross margin percentage increased from 68% to 67, 6% due to the positive impact of higher Rx margin rates and the disposition of the retail brand business I just mentioned.
Beyond the financial metrics. We are also enhancing all of our internal metrics for all functions and will be sharing some of these metrics with you and subsequent quarters.
SG&A increased from 26 million to $41 million primarily.
Again due to the addition of RF and other companies that were added to the new age group at the end of November last year.
Although this is an increase on an absolute dollar basis SG&A as a percentage of revenue decreased from 46% to 33% this year.
This reduction of 13 percentage points as a result of capturing cost synergies on a higher revenue base. Despite this progress on SG&A. Our objective is to be at the industry average of 25% of net revenue.
Adjusted EBITDA improved from a loss of $5.5 million and Q2 of 2022 of positive $1.7 million.
We will continue to report and discuss adjusted EBITDA as a key metric used to manage our business going forward.
Included as an add back to adjusted EBITDA is a $4.3 million charge related to the sale of the retail brand business that was sold last year.
This is the impact of trailing liabilities and of note receivable, which we have deemed will not be collectible.
This is identified as a separate line item on the income statement in the Q.
Net income was a positive $17.4 million or <unk> 11 per share and increase of 21.
Versus the second quarter of last year.
Net income will continue to be significantly impacted by the change in fair value of the derivative liabilities and liability classified warrants, which was $31 million this quarter.
These instruments were used in our acquisitions and current financing.
In essence, and increase and our stock price has a negative impact on the change in fair value and accordingly, net income, while a decrease and our stock price has the opposite effect.
Turning to the balance sheet, we of $92 million of cash and $31.5 million of debt.
And the early part of this third quarter $9.7 million of PPP loans were forgiven.
As Brent mentioned, our focus is on expanding our EBITDA margin enhancing free cash flow and driving profitable growth.
The projects for reducing cost of sales and SG&A costs are already underway and coupled with additional actions, which we expect to initiate with our team. Soon this will further expand our margins.
We have and attractive balance sheet and cash position and we believe we have access to more payable forms of debt going forward that will enable us to reduce interest expense and pursue additional growth opportunities.
The close I'm very happy to be here as part of the new age leadership team.
I believe we have a strong financial foundation, and a fairly strong financial flexibility to pursue our growth agenda.
And there are many improvement opportunities, which are being identified and I'm confident that the team will be able to capture those.
As far as the future view, there are still too many moving components, including the continuing specter of Covid on our brand partners and our rapid growth from acquisitions.
As we gain more visibility and begin to deliver on operating efficiencies and capture the synergies of the acquisitions that we have already discussed and I will be able to provide guidance I expect this to be in Q1.2022.
And with that I'd like to turn it over to the operator to open up the line for questions from our analysts.
Okay.
Thank you we will now begin the question and answer session to join the question queue and you May Press Star then 1 on your telephone keypad.
And we'll share a tone of acknowledging the I request. If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then 2 well the pause for a moment as callers join the queue.
The first question comes from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good evening and thank you for the question.
So the question for me and How's it going on.
Alright and talks about prior you know you know this COVID-19 you know kind of opened up the opportunities for the direct selling model. So really you know so beyond just kind of maybe face to face meetings and are you guys opened up the more of the interactive you know video conferencing meetings. So I was just could you provide some input in terms of you know now where you see things.
And you're absolutely in terms of some of the long term impacts do you believe that might stick in terms of you know the directionally model seems to be no well suited with somebody and micro Influencers initiatives and then also maybe if you could you know price of pub, how you plan to leverage that with the new announcement with Burbs I think that'd be helpful. Thank you.
Great question here and I mean, I do think that Covid is an accelerant for this model right and the move towards direct to consumer route to market delivery, whether it's from Amazon or it's.
By now buttons on a plethora of media sites.
Or the entire direct selling industry Covid has really been an accelerant and with the.
Many consumers.
Working from home too and the all looking for new sources of income, especially in developed markets.
It has been a good underpinning for.
A and move towards direct to consumer delivery and the social selling.
So we think the underpinnings of our business model are really strong and.
And it really is this accelerant and the whole social selling round, which is really our focus so we have the.
This group of more than 400000 brand partners and customers and.
We just are building on that.
And like.
Like as fast as we can and that's 1 of the reasons, we're seeing such good growth good growth in Europe, and the United States. So COVID-19 does impact us everywhere and negatively in terms of the ability to operate.
You know for the most part we've been able to work through that and offset the negative impact of really not being able to operate and Indonesia, having ups and ups and downs in the in Japan, and and other parts of Southeast Asia, and Latin America, but.
On the the social selling and and and Frank frankly, the tax that we've already employed with our frictionless checkout with smart link and some of the new Tech that we're rolling out like verb like you said I mean these are best in class apps that enable all of these brand partners and convert them from what used to.
The pure relationship based selling to now of all social selling fully leveraging their networks and new networks as people respond to.
Their influence whether they'd be of nano influencer, that's fine with only a couple of hundred followers to of micro influencer with.
And as the followers to regulars the influencers and large influencers with more than 10000, and we have them all and we love them, all and we're just enabling them with the right logistics the right products.
And the right support and the right training as we expand out where we think is really and on trend business model.
Yeah.
I think of that going back and that's very helpful. And then the second question from me then.
All of them and outflows you know further along with the integration of <unk>.
I just want to know could you kind of speak to new.
And you are today with the company in terms of made and hunkering down on the existing business are still exploring further M&A opportunities you know you'd previously mentioned and you know other marks from the past. So that's the kind of you know get of gate in terms of you know where you feel of the overall environment of today with the kind of the existing business and future opportunities.
M&A. Thank you.
Yeah on the core business, we're focused on 4 regions, which is Japan, and China Western Europe, and the Americas. So we're still focused on this core regions and we see a lot of organic growth opportunities. There. So you know we are launching.
Launching a whole range of new products leveraging some of some real competitive advantages we have within our core platforms. So we see a lot of organic growth opportunities in front of us and Thats, 1 focus and the second focus and then I went out and ask Kevin to talk to us improving EBITDA margin, but the third.
Focus to your question is on M&A and M&A has 2 benefits in addition to providing the scale and strengthening our position and those core markets and within our core platforms by getting more scale and continuing to employ our 3 G like synergy model that in.
Creases and.
Our our overall revenue, but it decreases the relative SG&A as a percentage of net scale sales to continue to drive EBITDA margin, which is the key focus of Kevin a key thing that we believe is going to drive equity price appreciation for our shareholders.
And Kevin really brings a whole wealth of experience not just and M&A and M&A integration, but also in terms of driving the holistic financial performance Kevin.
So we're excited we're creating all of the metrics and the Roadmaps as we speak and we can update too.
Future quarters on all of that.
Okay.
Alright, great. Thanks, I'll jump back in the queue.
Thanks, Darren Thanks, Sharon.
Once again, if you have a question. Please press Star then 1.
The next question comes from Mike Grondahl with Northland Securities. Please go ahead.
Hey, guys. This is Luke on for Mike Congrats on the quarter and thanks for taking the question here.
And so it looks like Europe, and U S were up again, and some new products and the pipeline there.
Just wondering if theres any particular brands of products you guys see as kind of significant growth drivers going forward or and any particular geographies or kind of attributes of the to the top line growth or just kind of any color on on that.
Yeah, Great question actually and.
And I wish I had a simple answer because it's different things in different places driving the growth and Europe is really R. R.
Our healthy appearance of inner and outer beauty platform with our new brand loosen debt.
Investors May remember it got picked up by our Italian Vogue and get picked up by the good faith project, which at which.
Our rate of these products as some of the highest quality and cleanest least toxic best for you skincare products out there on the planet right. So we're really happy with that kind of recognition and that's driving a lot of the growth in Europe, especially with.
Younger I would say predominantly women posting these products as part of their lifestyle and integrating them and their lifestyle that plus the weight management products. So we have a product called Slenderize debt you know kind of code goes by Skinny drops and if all of these people's tickets.
Kidney drops to to lose their COVID-19, so those of the products that are really driving the growth in Europe, and in Asia Pacific and Japan, notably its been CBD and Noni, that's been driving a lot of the growth and the whole range of this and know of products that are really outstanding the beauty of rest prop.
The core care product and the new <unk> of a product that is a is really a great product. That's also as a core of noni and we actually see it and a lot of growth in noni that is almost the 200 million dollar brand for us, but we think we're just getting started with that brand and new science is coming out of that but I can't.
Mentioned yet.
But we expect to leverage that new science behind Noni.
For its real benefits for consumers and communicating that that worldwide. So it's a combination of things over and Asia Pacific and and North America.
I'd say its kind of equally split amongst all of the brands and on all of the businesses, what's great about the and the Rx side of the combination of especially in the Americas and especially in Europe is look these guys are of growth business. Their leaders are tremendous and and of course of all of our leaders of.
Tremendous across the board, but the leaders coming from the arc side boy. They were really driving tremendous growth and people are just joining the system and joining this kind of momentum that we have.
On.
And and just getting excited and the Rx management.
I think and our industry was second to none and they're really teaching us how to.
Become the and organic growth machine and and and I really appreciate all of their education and frankly as we drive this and you know those of the organic growth driving initiatives I mean, you and error and sort of asked them to about other additions and there are a plus.
<unk> of of M&A opportunities and as long as the opportunities are a accretive for shareholders from an EPS standpoint and.
And b they fit in both strategically and with our other financial metrics and importantly, they fit with our culture and add to the strength of and the overall management team and what we're intending to do.
And serious looks at them, but are there and number of those on the plate and we think we are in the book.
Both cash and debt and and and equity where we have to position to be able to execute on the external growth agenda also.
Got it that's helpful. Thanks for taking the question guys and I appreciate the comments on the M&A pipeline there too.
Congrats again on the thing thanks Luca.
The next question comes from Sean Mcgowan with block. Please go ahead.
Thank you a couple of questions..1 can you give us a little bit more color on that are the issue of the uncollectible note receivable is that.
Is there any expectation of getting anything for that and the future.
Yeah.
Look, we're certainly putting all legal and professional efforts towards collecting it but right now it looks doubtful, which is why we put a reserve for it.
Okay and is that the full amount.
Yes.
Okay.
We won't get and you try and it's granted the walk it won't get worse that it could get better, but it's not right to manage the and expectation that it'll get better.
Alright, and trying to make sure there wasn't another shoe to fall there.
Can you talk a little bit about the accounting for the loan forgiveness of the PPE loan forgiveness, how does that.
Flow through if it does.
Yes, it does flow to kind of.
Bringing on 1 of my colleagues here Carl rig who's our corporate controller Carl could you comment please.
Yeah sure I'd be happy to Kevin Yeah, the way that the PPP loan will be accounted for in Q3 here as we got formal approval that they were forgiven here in July and so as we report the Q3 earnings.
And that Youll see that debt forgiveness, showing up running through the income statement and in Q3.
Okay and are there.
It shouldn't be any current tax implications for that or would there be any.
No there would not be.
Okay.
And then another very technical question and I can't remember if I've seen a share calculation chart quite like the ones you have now and the 10-Q.
Is it possible for us to know in advance what the shares are the ones that are going to show up each quarter ahead of the of the actual reporting of the results.
Yeah.
Yeah, again that 1 is going to be difficult because of the variability structure of them. So.
I don't have a and answer that we're able to give you.
And of the quarter no.
Okay.
Thanks, and then the PACU Brent if you could talk a little bit more about the children's vitamin.
And I think what what's your expectation for that going forward.
Well I will tell you Sean.
Like my children, and I Love all of our brands and all of our products equally.
That being said they don't all have the same potential.
But neutral 5 kids as a tremendous amount of potential and we tested and and initially in China. It and we kind of sold out of it there and expanded it out and and.
And the way our R&D teams work I mean, they look and they survey everything that's out there retail and across all different aspects of in this case children's vitamins to come up with the absolute best. So we think that this is the absolute best on the planet so much more efficacious than any gummy debt.
And we try it out there the kids might like the taste of gummies and the mouthfeel, the gummies, but that doesn't necessarily mean, it's delivering the right level of vitamin D and the kids need so I give our R&D teams such props and if we can just really frankly from a marketing standpoint get the word out there of how good this product is.
And how good this product is relative to everything else out there on the planet and we've tested it all buoy consumers will gravitate towards the this for their kids because of.
It really is outstanding.
Okay. Thank you very much appreciate it.
Thank you Sean Thanks, Sean.
Operator, I think that concludes our call for today.
There are no more questions from the telephone lines.
Very good everybody. Thank you so much for joining us today. We appreciate your attendance because we know you have alternative calls to listen to today.
And we look forward to talking to you next quarter. Thank you very much.
This concludes today's conference call you may disconnect. Your line. Thank you for participating and have a pleasant day.
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