Q3 2021 Newage Inc Earnings Call
Good afternoon, and welcome to New age incorporated third quarter 2021 earnings conference call. During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the foreign your telephone if at anytime during the conference you need to reach an operator. Please press star Zero as a reminder, today's conference is being recorded I would now like to turn the conference over to Lisa Mueller, New age Vice President Investor Relations.
Please go ahead.
Thank you operator, and thank you all for joining us today to discuss new age its third quarter, 20th 21 financial results.
I'm here today with Frat Willis Chief Executive Officer of New age and Kevin Banyan, Chief Financial Officer on today's call Brent will provide an overview of the operation and progress against our strategic initiatives and then Kevin will provide a summary of our financial performance before we open it up to analysts question.
I'd like to remind everyone that this conference call may contain forward looking statements, reflecting management's current expectations regarding future results of operations economic performance financial conditions at Cheeseman said the company forward looking statements specifically those concerning future performance are subject to certain risks and uncertainty.
Cheese factor.
Factors that could cause these results to differ materially are set forth in our annual report on Form 10-K, and in our 10-Q filed with the SEC.
Any forward looking statements that we make on this call are based on our assumptions as of today, we undertake no obligation to update these statements as a result of new information our future events.
During this call we may present, both gap 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.
Now like to turn the call over to Brett Willis, Our Chief Executive Officer Frank.
Thank you Lisa and as an aside I am so excited that you are part of the company and excited about the contributions are gonna be making for both the company and for our shareholders.
Good afternoon, everybody and thank you to everyone for joining the call today.
Today's call I'd like you to give you some insight into progress against our major strategic priorities provide perspective on our overall performance for the quarter and highlight some of our major drivers of our results going forward and then Kevin is going to take you through the quarterly financials.
First.
Let me start off with a review of the quarter.
Revenue increased 59% year over year to 100 million.
Gross margin improved six four points.
266.3% in.
And adjusted EBITDA also improved by almost 50 per cent versus last year.
And achieving these results in the context of everything going on in the World Wow. We're in the midst of acquisition integration and all that is associated complexities is not easy.
That only that because we are managing our business to deliver sustainable inconsistently growing EBITDA overtime.
We have had to make some decisions that may impact our results in the short term.
But which are central to building, our foundation and providing a springboard for growth.
And then the third quarter, we made some of those decisions for the long term, especially in the upgrade and the integration of our systems across all partner companies make.
Making a number of cost reductions to improve S. G and a as a percentage of net sales and further integration of our operations. We made these decisions for the long term health of our company, but they did have a short term impact in Q3 for.
For example, the one time system integration had a negative impact on revenue.
Also in the third quarter or China business was negatively impacted by the industry changes enacted by the PRC government in Japan continued to feel the effects of the government sanction from last year.
On the flip side, we saw good growth and a number of geographies around the world is these markets began to get back to work following COVID-19 shut down.
We overcame many of the complexities in the quarter as evidenced by improvement in our key indicators, our monthly auto ship subscribers increased 15% versus the prior quarter, an average order size was 6% higher.
And the reason we track these key metrics across all of our markets really on a day to day basis is because they are the leading indicators of revenue in the coming months and for the most part these indicators are all improving and moving in the right direction.
Looking ahead.
We'd leave the system's upgrade and most of the merger integration items that impacted the top line in the corner or one time in nature and largely behind us, but we still have a few open items to complete.
We are however, encourage Brian proving top line growth trends in the fourth quarter underlying demand as strong evidenced by the metrics of our brand partners and we anticipate sequential organic growth in queue for in the high single digits.
We remain focused on what we can control delivering on our promise to all stakeholders to drive growth and to do so profitably.
While our supply chain remains strong and we've had no major out of stocks are lead time and cost on many of our raw materials production and shipping have all increased like virtually every other CPG company in the world Kudos.
Kudos to our operations team, however, who have managed through the complexities like Champs.
As a result, though we have had to hold higher inventory than planned and this has a cash cost to us.
But ah redundancies that we have built into our supply chain are proving to be robust.
But when we look at 20 twenty-two these actions are gonna be even more critical because we don't expect the global supply chain complexities to diminish.
We're also harmonizing, our manufacturing and logistics footprint globally, which led to the closing of our minds, Germany European warehousing and establishing more operations locally and both the Netherlands in Italy.
This has reduced our cost and improved our ability to serve our customers on a more local and locally centric basis.
All these actions together have helped us improve our gross margin a full six points versus last year. This is the end result of all of those actions and reduced SG&A as a percent of net sales that Kevin discuss.
Now these priorities are component parts of methodically growing profitability and capitalizing on the underlying trends.
That will propel our business forward. These are mega trends like consumers pursuit of health and wellness worldwide and the demand for healthy clean products are are N. D. Team has been really went with and developing a pipeline of healthy functionally differentiated brands that are.
There as efficacious as they are safe and many of which have important benefits that frankly approached the boundaries and historical turf of big pharma.
For example are scientists discovered that our Tahitian noni juice inhibits the ability of spike protein to bind to human cells, adding to the long list of health benefits guarded from this incredible super fruit and.
And we're excited to have recently launched or lose some eyelash volumizer and natural lip plumper.
Also developed 100% in house.
Tapping into the growth segments within the healthy appearance category. These products were just rolled out to our North American brand partners and the initial inventory sold out within hours.
We think we're just getting started in her business model with our aggregated base of Influencers, we continue to invest in technology enhancements such that our brand partners can use social selling seamlessly and develop multiple revenue streams and we are continually rolling out new tools and tech to <unk>.
Help them expand their businesses and speaking of expansion. We just opened up the southern cone of Africa and will be expanding in many of the surrounding markets beginning in the fourth quarter.
We are running the business for the long term to benefit all of our many different stakeholders are investors of course, but also our associates are brand partners customers suppliers and the communities we serve worldwide.
We are working towards the same goal, making this transformation to become the leading social selling and distribution company in the world.
It's not built overnight.
But we think we have a world class team.
Recently bolstered by the additions of Gen Grafton as our new General counsel.
Lisa Miller is our new head of Investor Relations and Karina Mcdaniel, who was promoted internally to become our chief marketing officer.
We also will be evolving our board as we progress to the next level.
I want to personally thank Tim has who recently announced his retirement after four years of dedicated service to the company.
Kim was a great and values centric leader for our company.
And he and I have personally known each other for over 20 years. Since he was my boss at the Coca Cola Company.
He is now 75, and we have had just about enough of each other.
You will be sorely missed however, both personally and professionally but deserves all the credit in the world is a fantastic N tough board member as a leader and as a personal mentor personally Tim. Thank you.
As we have all of our board and as we strengthen our leadership team and team of dedicated and a passion brand partners.
We have a tremendous amount of confidence within increasingly clear.
Clear line of sight to achieving our financial objectives increasingly.
Strong commitment to making a difference for the planet with healthy products and increasing belief in our unencumbered opportunity to become the leading social selling and distribution company in the world and with that I will now turn it over to Kevin to review, our third quarter results in more detail Kevin.
Thank you Bryant and good afternoon from our global World headquarters in Denver, Colorado.
By discussing our financial results for the third quarter, followed by comments on our balance sheet. Please.
Please note that all comparisons are year over year, unless otherwise noted.
We will also be discussing non-GAAP results in a reconciliation of non-GAAP financial measures is included in our earnings release and 10-Q.
On a consolidated basis third quarter revenue was $100 million compared to $63 million, which is a 59% increase over last year.
The increase was primarily due to the acquisition of Rx and alive in la.
Last year's revenue also included $2 million from the retail brand business, which we sold in Q3 of last year.
Our acquisitions contributed significantly to a year over year growth with revenues growing 50.
54% in China, 24% to Japan, and 16% in the U S and also providing entry into new markets, such as Italy and France.
Gross profit increased from 37 million to 66 million, primarily due to the additions of Rx and alive and and also margin enhancement activities.
Overall gross margin percentage increase from 59.8% to 66.3% due to the positive impact of higher sales mix them, Rx and alive, and which carry a higher gross margin than our legacy DSD segment.
The increase was also partially offset by higher freight costs.
SG&A increase from 28 to 39 million, primarily due to the addition of Rx and other companies that were added to our group at the end of November last year.
Although this is an increase on an absolute dollar basis SG&A as a percent of revenue decreased from 45% to 39% this quarter.
Long term target for SG&A remains at 25% of net revenue.
His brand mentioned, we made excellent progress in the third quarter, making improvements to our cost structure we.
We reduced annual compensation costs by over $3 million closed several offices and sold the American Fork, Utah manufacturing facility both of those save an additional $2 million annually.
Adjusted EBITDA improved from a loss of $8.4 million in Q3 of 2022 lots of 4.4 million this quarter.
Included an adjusted EBITDA are two non-cash items at 9.8 million dollar gain for the forgiveness of PPP loans, and a 16.2 million dollar impairment charge for the right off of the Noncompete agreement from our Rx combination.
The net loss was $2.7 million or two cents per share an improvement from a net loss of $14.1 million or 14 cents per share versus the third quarter last year.
Net income will continue to be significantly impacted by the change in fair value of the derivative liability and liability classified warrants, which was $19.5 million this quarter.
As a reminder of these instruments were used in our acquisitions and current financing and an increase in our stock price has a negative impact on the change in fair value and accordingly, net income while a decrease in our stock price has the opposite effect.
Turning to the balance sheet, we have $62 million, a total cash and $18 million of debt.
We responded to the current supply chain pressures by increasing finished good inventories, which enables us to continue to meet consumer demand.
We maintain a strong balance sheet with low leverage and we are well positioned to take advantage of potential growth opportunities as well as invest in our current infrastructure.
Looking ahead, we anticipate having more visibility as we move beyond the integration of our acquisitions and it's COVID-19 transitions from pandemic too endemic.
We expect to be able to provide guidance for the year 2022, when we report fourth quarter earnings in March and.
In the meantime, as we are six we could add the fourth quarter. Our revenues are training higher in the high single digits compared to the third quarter.
Before turning the call to questions I want to make mention of two grants of common stock that are coming up this quarter. The first is a tranche of 167 million shares which was approved by shareholders and may the second tranche is the 12 month payout Oh to the Rx shareholders as part of the merger agreement, which is set had a <unk>.
Target of 25 million shares.
The actual number of shares to be granted will be dependent upon finalization of working capital adjustments.
Both conscious are subject to a six month lockup provision.
Looking ahead, we remain confident in our growth strategy and we are incredibly optimistic about the future for new age.
We are committed to improving shareholder communications and delivering a best practices Investor Relations program.
And with that I'd like to turn it over to the operator to open the line for questions for bar analysts.
Thank you alright, and ladies and gentlemen, if you would like to register for a question you can do so by dialing one four that's one four by four on your telephone keypad right now now you're gonna hear three tones to acknowledge your requests and as your question has been answered.
You would like to withdraw your registration you can do so by dialing one followed by the three.
Alright, once again, so to kill for questions. Today. It's one four that's one four by four on your telephone keypad or right now.
Our first question is coming from the line of Mike Grondahl from Northland Securities You May now proceed.
Hey, guys. This is look on for Mike.
I'm wondering if you guys can talk a little more on geographic performance during the quarter and any assumptions going forward and any specific regions as far as continued disruptions or rebound you expect.
And then secondly wondering if you guys have any updates on the <unk> front I think last quarter. You guys mentioned you are still kind of putting the roadmap together in this area, but just wondering if your appetite for M&A has grown or if you're more focused on kind of leveraging and building up the core platforms organically.
Yeah, Great question Lou. Thank you, it's Brent here Uhm on the geographic side, one of the scourges and benefits of being in 75 marketers, sometimes some go up in certain regions of the world sometimes some go down.
As mentioned on the call we have had the impact in China due to the government changes there.
And we have had the impact in Japan.
But as we worked through those issues and we think we're working through both of those issues, there and adjusting our business models and and rolling out our social selling tools in China.
And and integrating our businesses, including our newest business, they're alive and in Japan, We see renewed growth in those markets Europe continues to grow well for us and.
And as does the America's so.
It is a combination of puts and takes but we do see growth opportunities across all of our geographies and do the second point of your question.
Whether organic or external growth uhm, we still see a whole wealth of opportunities out there and.
We've been cautious in pursuing those external growth opportunities because we wanted to get the foundation right, especially in our systems.
So you know it's kind of nine months since we've had Rx and no knees and no my V Lima and arrive in together right, which in acquisition integration timing is a very short period of time. So we're still in acquisition integration mode too.
Deliver that the costs and the revenue synergies from all of the benefits of those acquisitions, which we captured a lot of those incrementally as Kevin mentioned in terms of lower SG&A in compensation costs and the quarter. Those are all benefits of the of the merger and we're.
Well in excess I would say of the initial synergies that we committed to to shareholders to achieve from that combination. So we spent this year really an acquisition integration and and I would say as it relates to external growth for the right price.
Primarily using that because we don't believe that we can use our equity at this price.
For acquisitions in any significant measure.
We think that that.
As those opportunities come around to add scale and reduced SG&A, they've got to really deliver for us financially on those two friends, we'll we'll definitely look at them, but there is a whole host of opportunities out there companies that would love to join us, but right now our focus is continue to drive the integration drive EBITDA margin.
Drive organic growth and as external growth opportunities come about where we can intelligently and methodically integrate and we'll we'll definitely look at those.
Got it thanks, guys and then just kind of a quick follow up here on the acquisition and integration front.
As far as Rx.
Anything to call out there is that still outperforming or is his expectations and.
Is that.
You guys still planning on growth from that segment.
Yeah, I would say look we committed and and communicated and we would deliberate 20 at least $20 million in cost synergies and I would say that were at least 30% ahead of target now it doesn't and we committed that that would happen in a crew to the P&L over a 12 to 18 months period of time.
So nine months and we have visibility to at least 30% improvement on that number and we expect that to fully materialized probably.
Closer to the 12 month timeframe from an acquisition standpoint versus 18 months, so a little bit faster than anticipated and about 30% greater than anticipated.
Got it thanks, guys all have back in the queue.
Our next question today comes from a line of Sean Mcgowan from a Roth capital partners, even I'll proceed.
Thank you can you hear me okay.
Hey, Shaun.
Good. Thanks can you quantify or help us understand the magnitude of the effect on revenue of that system switch over just how much did that cost you.
Yeah. This is Kevin Shaun so.
So I think look that's a lot of art.
Rather than science.
I would say it certainly was.
More than a couple million Bucks and you know.
Yes, and 15 ish. So it was a issue that happens a lot when you integrate two businesses and have to reeducate. All your brand partners and your sales teams. So the guy has done a great job of integrating in stabilizing but it's been hard work and it was certainly bumpy.
Because we were going very fast across a lot of.
Countries and a lot of geographies.
Okay, Uhm and maybe you can help help me understand something so last year.
2020, you didn't have the Rx until the fourth quarter and your third.
Your second and third quarters were about the same you get to the second quarter of this year is very big contribution from Rx and not it does it seems like maybe not as much in the third quarter. So can you help me with the kind of breakdown of organic versus acquired growth in the third quarter compared to last year.
There wasn't a lot of seasonality so it's not really bad but it is a measure and a combination of this integration.
I think when you look at the competitive said they saw.
Similar kinds of organic impacts in Q3 versus Q2, we saw the same as basically people were pent up.
For 18 months and some of our brand partners took vacation, especially in Europe. Because this is the first time, they're able to do it in 18 months. So.
They took the pedal often that a little bit there in that respect and that we.
We had the challenges as we mentioned both with the.
That should be Japan impact from the sanction from last year.
That wasn't in the numbers the impact of the PRC government changes in terms of shipping models and bonded warehousing and other impacts there.
And the impact of the system's change over which really affected us worldwide. So all of those three things. We think are one time impacts, but they did impact on a sequential basis versus Q2, and I think the headline for US is look we still see this as an attractive growth business organic growth <unk>.
<unk> and that's why Kevin mentioned, we see are ready for Q4 high single digit growth.
Moving into into Q4 as we as we work through these integration challenges and build the right Foundation to help our brand pick partners throw their business worldwide.
Okay, and just to be clear, that's sequential as compared to the third quarter that high single digits.
Correct.
And Uhm, Kevin would you expect given a bunch of the expense commentary would you expect.
To even thought it'd be positive in the fourth quarter.
I am not going to give guidance put the answers certainly if we've made a lot of investment and.
Eliminated some redundancies in positions and rationalize are.
Real estate footprint. So it's certainly SG&A costs will go down.
Okay down and dollars you mean.
Correct.
Okay alright, thank you.
You're welcome Thanks, Sean.
Two quick reminder, for everybody if you'd like to register for a question you can't do so by dialing one four that's one followed by four on your telephone keypad next.
The next question is coming from the line of Erin Grey from Alliance Global you May now proceed.
Hey, guys.
Are you guys able to hear me now.
Yeah, We got you did.
Alright, hi could even thanks for the question I started it back over [laughter]. So first question for me supply chain issue that you spoke to Bryant I've seen issue that's impacting almost everybody in within the industry today, but you're kind of spoke to a kind of having you know continuing impact for you guys and just curious.
You spoke about sometimes the system's consolidation noticed wondering in terms of if the supply chain issues, how much of an impact that might've had and if you expect them to continue does that kind of impact maybe the pace of top line growth you guys can have going forward, especially as you try and integrate these two businesses and being in 75 countries. We're trying to get a better sense of how soon.
[noise] digit growth.
For the fourth quarter, how do we think about that going into twenty-twenty too. Thanks.
It's a great questionnaire and and I will tell you the supply chain complexities are real.
That being said I can.
Can't Overemphasize, how proud I am of our entire operations and supply chain team and what does a superb job that they've done and I don't think we've had any.
Had a negative impact on revenue or disruptions from a supply chain standpoint, we haven't had any out of stock. So that's one the second data point in terms of performance on a supply chain an operation standpoint is improvement in gross margin of six set the end result of shipping and cost of goods sold management.
And margin improvement in portfolio and improvement in.
And margin from value engineering of the portfolio. So the team has done a superb job on all three of those friends too and then lastly, everybody I think on the planet knows of the long haul logistics and over water logistics difficult.
That are happening around the world.
And the.
The the things that we've done to alleviate those of we're doing a lot of less shipment, let's say from Tahiti, Indiana state and rather we're doing shipments from Tahiti directly to in country markets number one a lot more in country production number two and just avoiding having to ship out from the U S to the.
Rest of the world. So because we've made those adjustments in our supply chain over the past I would say six or nine months. It really puts us in a strong position to continue to manage the business unencumbered.
Okay. Thanks for that car and it's great to that supply chain issue wasn't a big impact on the top line you know during the quarter free guys know how to stalk yet order honestly it was systems Erin.
As we integrated that and that's a huge deal it was China in terms of the rule changes, but I think we're really through that and boy, China looks fantastic so far in queue for and and it was the the.
Japan sanction.
Recovery and that is coming back around a bit slower, but still coming around.
Yeah.
Okay. That's helpful. So they can kind of as we look forward I know you guys aren't giving guidance right now but.
I just think of all kind of.
Maybe sometimes normalcy after after Covid you guys had <unk>.
Implement a lot of Omnichannel initiatives made coven sent home mortgage people spend a lot more time then.
In the house, but as people get back out.
Are going back on you know taking their vacations I could talk about some of your own.
Employees now how do you think about the business and maybe people spending more of their discretionary dollars on vaca on vacations or otherwise more you know out.
Out of home experiences and how that might impact the sales trains as we look head into 2022, just trying to get a better sense of maybe those organic growth opportunities for your omni challenge today. Thanks, Yeah, I'm a negative side first let me deal with that right just to be balanced in terms of the situation assessment tunnel.
Negative side, especially in Q3, you saw people get now right you saw less brand partners. Joining this sector. This industry and overall I think there was about a 20% decline or 21% decline in brand partners or reps or distributors, whatever you want to call them.
[noise] participate or joining in this industry and so I think every competitor at least in direct selling felt that effect. That's short term no longterm, we see real trends towards direct to consumer purchases and direct to consumer shipping and away from traditional retail and we don't think it's.
Go back we think traditional retail will continue to be disintermediated that is really in our sweet spot in a fantastic tailwind for us we see the real trends towards healthy products and the needs for consumers to to intake.
Intake more healthy products cases of recognizing that self care is the new health care and we're right on trend there and then frankly in terms of what is influencing purchase behavior and buying decision does not television advertising anymore.
It's not print and those kinds of things, it's not your point of sale marketing within traditional retail it's word of mouth and it's people's social fees that are impacting more than 90% of purchase decisions. In every single region of the world and guess what that is us too.
So from a business model standpoint, even though we're in the first inning of execution of the business not only just pulling the scale and the companies together and all of the social selling tech to kind of put that on nuclear overdrive Erin.
We have all these tailwinds.
Behind us that are headwinds for this trillion dollar consumer goods industry, but tailwinds for us so.
If I could go back in time, and the Monday morning quarterback I wouldn't change a single thing right now in our business bottle I, just I would accelerate it and get it done faster I, we'd get more scale because the benefits of scale as we pointed out to investors.
Really has the benefit on on lower SG&A and higher EBITDA margin. So that is still our focus in the short term of drive more EBITDA margin drive free cash drive positive operating income margin, but as we continue to do that we want to drive the top line.
And we have all these tailwinds behind us that will support our execution of the business model, but.
Even even if I had hindsight I wouldn't change a single thing of the business model today.
Thanks for that friend, that's that's really helpful color and then if I could just ask a third question kind of putting some of the pieces together here right. So in about $100 million for the quarter you'd peak about 120 $526 million the first quarter.
It sounds like it's going to be some time to get back to that peak level. You know high single digit will put you around you know want to wait one O 944, Q. So is it fair to think that skip to that 125 126 run rate is going to take some time for you guys and it's better to think about that made high single digit sequential growth rate as being the best.
You kind of measure kind of going forward for the next couple of quarters. Thanks.
Well I think again, we're not giving guidance yet and we're certainly working on the 2022 plan.
I think as the pandemic becomes an endemic we'll get a better view as to our ability for our brand partners to be together and then certainly it's been mentioned we've got some new products that we've introduced here in North America that seemed to be off to a pretty nice dark.
So I.
I think there's plenty of optimism, but we'll put numbers on it when we talk again in March.
And I would say just to follow up on that Kevin's right. We're gonna take a cautious underpromise approach.
And and we'll come back to you on March but you know I've just been out with our group President Mark Wilson, who I.
Continue to believe is by far and away if not the best one of the best in this industry at what he does and he and I have just been out.
He was in Spain, our teams were out doing business partner meetings in in Germany in the UK and then I got to participate in like.
Thousand person kind of meetings in France, and Italy over the past couple of weeks and we had a huge one in the us and another one coming up this weekend in the U S. So we're getting back out to the to the business and the excitement of this company and I hated and I don't want to overstate, it, but the excitement and the company and the optimism in our company is power.
<unk>. So we're just going to build on that and build on that momentum and belief, but you know I would say to olive investors look. Thank you for your confidence. Thank you for participating in our call today and for the continued support and interest in new age.
We're going to be participating in the Roth corporate access conference coming up and at the ICR conference coming up in January so.
Thank you for the questions today and please feel free to reach out at any time, if we can answer any additional questions and thanks for the continued confidence support and belief to Oliver very value added and investors. Thank you.
Alright, and leaves the gentleman that will conclude the conference call for today. We thank you for your participation and you may now disconnect your lines. Thank you.
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