Q2, Q3, YTD 2023 Vintage Wine Estates Inc Earnings Call
Speaker 1: I.
Speaker 2: the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star V1 on a touchstone phone. To withdraw your question, please press star V2. Please note this event is being recorded. I would now like to turn the conference over to
Speaker 2: Deborah Poloski, Investor Relations, please go ahead. Thanks, Dave. Good afternoon, everyone. We certainly appreciate your time today and your interest in vintage wine and states. We have flooded you with quite a bit of information. Following the market clothes, we filed our restated first quarter 10Q.
Speaker 2: The press release, the details, the results for our year-to-date period, as well as the third and second quarter.
Speaker 2: And we've also filed our second quarter and third quarter, 10Q.
Speaker 2: So on the call with me here are John Merrimarco, our interim CEO , Kerry Wheatley, our president, and Chris Johnston, our CFO . So if you don't have a copy of our burnings release or the slide deck that will accompany our conversation's day, you can find them on our website at ir.bin.com.
Speaker 2: our SAFE Harbor Statement. As you may be aware, we will make some forward-looking statements during this presentation and the Q&A session. These statements apply to future events that are subject to risk and uncertainties as well as other factors that could cause actual results to differ materially from what we state here today.
Speaker 2: These risks and uncertainties and other factors were provided in our SEC filings that you can find on our website or at sec.gov.
Speaker 2: I will also point out that during today's call we will discuss some non-GAAP financial measures which we believe are useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.
Speaker 2: We have provided reconciliations of comparable gap with non- GAAP measures in the tables that accompany today's slides and release.
Speaker 2: So, let me turn you over to Jon to begin the discussion.
Speaker 3: Thanks, Deb, and good afternoon everyone.
Speaker 3: As you know, I have been acting as interim CEO since early February , and I can attest that we have been very busy working to turn the business around.
Speaker 3: We are focused on rebuilding the more profitable operating structure, realigning the business to focus on our quality assets, and creating a solid structure to deliver future growth and opportunities.
Speaker 3: Let me start with a quick overview of what I have found from taking on this role in my actions we have taken.
Speaker 3: overview of what I have found and taken on this role in the actions we have taken. First.
Speaker 3: WWE of next one team of people.
Speaker 3: In addition to being highly experienced and knowledgeable about agriculture, it's great, it's wine making, bottling, sales and marketing.
Speaker 3: They are very passionate about what they do.
Speaker 3: We have a growing finance team that has brought depth to our processes.
Speaker 3: They are all hand from this restructuring of our financial accounting processes from each book entry through to consolidation and reporting.
Speaker 3: Second, we have a number of great brands, award-winning wines, some awesome vineyards and top-tier tasting rooms, as well as a growing cider business and very creative sales and marketing programs.
Speaker 3: And finally, we have excellent potential to transform this business into a stronger, more profitable U.S. lying company, centered on key brands and operational exosylents that create stronger earnings power.
Speaker 3: There were also a number of things we needed to change.
Speaker 3: We have too much debt and faced with the impacts of rapid and significant inflation in the midst of slowing spend by consumers on discretionary items.
Speaker 3: We have to be good to a lot of our cash management.
Speaker 3: The team had already identified the initial actions we took that resulted in that contribution to make them a $20 million.
Speaker 3: This included raising prices on certain brands, increased shipping costs for our TDC business.
Speaker 3: Restructuring freight agreements and simplifying the business. And as part of that effort, we reduced our head count by about 4% at the beginning of March.
Speaker 3: We cleaned up our tail products.
Speaker 3: You were able to reduce our skews by half from about 4,000 down to about 2,000 thus far.
Speaker 3: These tail products represented the nominal amount of total volume.
Speaker 3: I believe we can further cut that in half again. This will be driven by the reduction of parent's cues from about 900 down to 500.
Speaker 3: Over the company's 20 year history, it included many acquisitions.
Speaker 3: There have never been any calling a smaller and significant inventory. The Strategic Action creates greater operating deficiencies, as you might imagine.
Speaker 3: I will leave a review of our results in financial status, but we'll point out that the proceeds from the sale of our 10-month-in-year would directly reduce in debt.
Speaker 3: As part of our evaluation of restructuring scenarios, we are also contemplating other potential asset sales to accelerate dead reduction.
Speaker 3: We are focused on driving operating the efficiencies, leveraging key resources.
Speaker 3: generating cash and monetizing assets. With that, let me turn it over to Terry.
Speaker 4: Thanks, John . I'll begin my discussion on slide 4 with the Hostail segment.
Speaker 4: For the nine-month period, wholesale revenue was up $4.3 million or about 7% to $67.3 million, including $8.2 million of acquired revenue from AIDS FIDER.
Speaker 4: Our VWE managed brands continue to outpace the overall US line market, including Bardog, Cherry Pie, Cundee, and Photograph.
Speaker 4: However, third-party managed brands, such as Layer Cake, under-performed and were down 1.8 million.
We also believe that distributors and major retailers throughout the period were reducing inventories as consumer spending slowed.
The nine-month period was also impacted by a .4 million decline from our decision to no longer produce the Guggenheim brand.
We are encouraged by the response from distributors of the new layer cake packaging that will begin shipping in early fall and new bar dog and a citer authorizations that will begin impacting shipments in the coming month.
Hostel operating loss for the year-to-date period reflects the impact of 127.5 million non-cash goodwill and incadentantable asset impairment recorded in the second quarter.
Turning to slide 5, let's look at the B2B segment results.
We are heavily focused on this segment to improve profitability.
It has benefited over the last few years from the sale of bulk whiskey, an opportunity that we had when we elected to not continue a bottling program when a customer wouldn't accept a price increase to make the line more profitable.
We are working with our customers to ensure we are capturing all of our costs, eliminating lines that do not make sense and focus on operational excellence to improve profitability.
For the year-to-date period, B2B revenue increased 11 million or 13.2 percent to 94.4 million.
The Meyers acquisition added $8.8 million in revenue.
We also had a growth of 9.5 million from custom production activities and 2.6 million from sales of bulk distilled spirits.
Offsettingness was a 10.5 million reduction in sales related to a mutual decision with a customer to discontinue a less profitable private label program.
For the third quarter, a $4.4 million increase in custom production and a $0.6 million contribution from the Myers acquisition helped to offset the $3.7 million decline from discontinued bottled wine and distilled spirit sales for a large retail customer.
and reduced bulk to still spirit sales of 4.1 million.
Year-to-date operating income was down on the lower volume from the elimination of less profitable product lines, the impact of inflation, and production inefficiencies, as well as $9.1 million related to the non-cash intangible asset impairment.
We are encouraged by our increased production output in the last quarter that we expect to deliver cost of goods savings in the future. Now let's move on to slide six and discuss my favorite segment, ETC.
While we had a strong start to the year in the first quarter, the last couple of quarters have not been the easiest for this segment.
A major television retail customer shifted their programming to respond to changing consumer behavior that was reacting to inflation and higher interest rates.
This impacted revenue by about 2.2 million year-to-date.
In addition, e-commerce sales slowed and tasting rooms dealt with exorbitantly high lodging costs, coupled with bad weather. As a result, DTC revenue was down 9% for the first nine months of fiscal 23.
Encouragingly, though, wine clubs, tele-sales, and e-commerce were up in the third quarter, and the wet weather has subsided and guests are starting to return to wine country.
Year-to-date operating income was impacted by 2.2 million non-cash intangible asset impairment charges, increased freight costs, and higher overhead burden.
Now, let me turn it over to Chris to go into greater detail on the financials.
Now let me turn it over to Chris to go into greater detail on the financials. Chris? Thanks, Terri.
Just briefly on slide 7, you can see consolidated revenue, which was up 3% for the first nine months of fiscal 23. Primarily as a result of acquired revenue, increased cuts from production involved distilled spirit sales.
This more than offsets the items Terry mentioned, including changes in eliminated product lines, programming changes, and weakness in DTC. If you turn to slide 8, I'll review trends in gross profit and margin.
In addition to the impacts of inflation and supply chain constraints, we took a 10.1 million write down to inventory in the third quarter.
This had a 14 and a half point impact on margin in the third quarter and a 4 and a half point impact for the year-to-date period. Without the adjustment, third quarter gross margin would have been 38 percent.
and the nine month gross margin would have been 35.5%. I do want to point out with the inventory adjustment, we are re-valueing about 6.8 million in bulk line that we expect can be put to future use and enable us to drive utilization of that bulk inventory. The skewer reduction that John mentioned from the John mentioned.
and eliminated product offerings that Terry spoke about, drove a $3.2 million write down of finished goods and dry goods due to obsolescence.
There are a couple of other elements that on a year-over-year comparison make this year's results look weaker. When in fact normalized across periods, that 38% gross margin is more reflective of the current underlying business fundamentals.
Moving on to slide 9, S-GNA for the first nine months is elevated at 92.5 million.
For the third quarter, while we did get to 25.5 million, this is admittedly artificially low because of approximately 3.5 million in stock-based compensation forfeatures.
As we look forward, we anticipate we will incur costs associated with our strategic efforts and leadership changes.
Itemize from the slide for you are 23.9 million in changes that more than bridge the year over year gap.
I'd suggest that about 9.5 million are atypical. Although I would again caution that as we evaluate our operational footprint and cost structure, as John mentioned, there will likely be costs incurred related to that effort.
If you move on to slide 10.
This simply demonstrates the impact of the non-cash impairment charge for intangible assets.
The inventory adjustment, lower growth profit, and the elevated SG&A on our financial results.
the 10.1 million inventory write down, Q3 would have resulted in approximately 6 million of operating income.
On slide 11, I think it's important to note that as we simplify our footprint and shed less profitable business, we are roughly at break even. We believe we can improve measurably from here and see fiscal 2024 as a transition year.
to focus resources where we can generate the best growth. Shed unnecessary skews.
to fix our current capitalization.
As you might imagine, these have been challenging times. Fortunately, we have a number of things that are working in our favor. First, we have a long-standing relationship with our bank. Their experience in the line industry supports a deep understanding of our business, and importantly, a strong recognition of the value of our underlying assets.
to gross up the PP&E on our balance sheet by about 25 to 30 percent.
While I don't necessarily like our leverage ratio, we have the underlying assets to support this level of debt. Nonetheless, we believe we need to reduce debt as quickly as possible to get to a more reasonable level. We continue discussions with our bank group with the goal of alleviating risk of noncompliance with covenants.
We are working to address the next few quarters.
For example, we think we should be able to add back the cost we will need to incur to execute on our business realignment scenarios. We are intentionally investing in the business to establish a solid foundation from which we can build and execute on our vision. To grow a family of line or even brands.
by producing the finest quality wines and delivering incredible customer experiences. I believe that with the combination of on-hand cash, revolver availability, and the cash we expect to generate from the business, coupled with our expectations to further simplify our operations.
that we have sufficient working capital to weather the storms with the cooperation of our banks. John , I'll turn it back to you now. If you turn to slide 13, I'll re-emphasize Chris' point that our primary goals are to increase profitability, generate cash, and reduce debt. There are a number of levers we need to pull to make this happen.
And we have been successful thus far, but as I mentioned earlier, we still have a lot of work to do. As I mentioned, we reduced our skis by half, which had less than a 2% impact on revenue, but should have a meaningful impact on our operations.
These efforts also work to simplify the administrative and reporting efforts which will have positive impacts on the material weakness inventory controls remediation efforts.
We are being very proactive with pricing.
Working with our distributors to drive volume on the strongest brands, which the Nielsen data suggests is working as well. We have assets we are evaluating for monetization to accelerate our debt reduction, and we are creating greater discipline around processes throughout the organization. We plan on presenting our options for realigning and rethinking the future of our products.
As a result, we are in the midst of a transition that does include shedding some revenues.
We expect this could be an order of an estimated $30 to $50 million, which entails elimination of less profitable products.
and the depletion of our bulk to still spirit inventory. We are realigning the business and are in the midst of a transition to return to a growing and profitable U.S. line company. Let me just wrap up on slide 14.
to say that we are encouraged with the progress we have made thus far.
We are excited about the plans we are developing to advance us further along the path of driving profitable growth. We are also encouraged with the process the Board is making in the search for a permanent CEO .
We expect that we should be able to update you further on both our business realignment plans and leadership in the next few months.
With that, Dave, we can open the lines for questions now. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star.
please press star then 2. Our first question comes from Vivian Azir with TD Cowen. Please go ahead.
star than two. Our first question comes from Vivian Azear with TD Cowan. Please go ahead. Hi, good evening.
Our first question comes from Vivian Azir with TD Cowan. Please go ahead. Hi Vivian.
So, thanks very much for all the color. Clearly, we're paying catch up on the story here, and I appreciate the transparency around all the forward progress around business realignment and business rationalization. So, I'd just love to start there. Appreciating that you guys are talking about, you know, a 50% ski rationalization and another 50%. Can you just contextualize that across your operating segments and where you think you have the most room to cut? Thank you.
Vivian, a lot of it will actually be in the wholesale and the DTC, because when you actually look at our SKU counts, B2B is not near as big as SKU count. But I want you to keep in mind that a lot of the SKU rationalization we're undergoing is a lot of tertiary SKUs, low volume.
And they won't necessarily take away a lot of revenue, but they will simplify the business and simplification leads to greater efficiencies which leads to greater profitability.
Absolutely, that seems perfectly reasonable. Just to follow up on that comment though, and probably less remain to DTC than it is for wholesale, there has been this legacy school of thought that there is a certain amount of scale to maintain relevancy with external partners. So how do you think about balancing that? Well, I think the balance as I said, we're looking at tertiary excusing. If you actually look at the marketplace today and you look at brands.
And Vivian, it really hasn't affected our priorities with our distributors. We still have the same top five, six priorities, which come down to Bardog and Firestein and Cundey and B.R. Cone and Leticia photograph and so forth. So we are not backing off our key priorities. Those volumes we believe by the simplification will accelerate.
So we don't expect our power or presence with our distributors to diminish.
Awesome, thanks for that, Terry. And just to follow up on profitability, obviously that was a key scene throughout the Prepared remarks, I think appropriately. So as I reflect back on segment level profitability, obviously, you know, M&A and other items have created, you know, on a multi-year basis, a lot of variability.
across the different business lines. Can you just level set where you think the hierarchy of profitability should fall out across your operating segment, please? So as we talked about before, Vivian, then when we get down to operating profitability at the segment, we expect that to level up.
Okay, understood. And just last one for me, I apologize for the long list of questions, but you called out pressure on the consumer as being a headwind to wholesaler inventories. I think that's part of it. But you know, if I reflect back on the commentary that we've heard through alcohol earnings season and actually frankly broader CPG higher interest rates are also key concerns.
I'm the interim CEO , but I also do a lot of industry reporting. And the best numbers I've come up with is that over the last six months, the distributor tier has taken out about 20 million cases of wine inventory in the US. And we think that's basically taking inventory from about 60 days on hand to about 45 days on hand. I'm averaging.
as you say because of interest costs.
So, I think it's been more of a headwind, but I think we may be getting past that as a significant headwind, but it's still just going to be the pressure of distributors will continue to watch their inventory and it will be a constant effort to make sure they don't get too short on inventory.
Understood. Thank you for all that perspective.
The next question comes from Luke Hanon with Canacord Genuity. Please go ahead. Yeah, thanks. Good afternoon, everyone. I wanted to ask a couple of questions on the balance sheet here. John , first clarification question for you. I want to make sure I heard this correctly. I think you said towards the end of your prepared remarks.
we would see as reduction in top-line revenue for the year. And that was related to elimination of some nonprofitable business with a major retailer. And then the...
finishing up the bulk spirits we had on hand and just to call out that's kind of what's going to impact top line in the coming year. Okay, understood. So then on the balance sheet here, you talked about potentially doing some additional asset divestitures moving forward here.
in terms of asset divestitures? Where do you see as the, we'll call it, the highest value assets that you're willing to part with?
Yeah, so thanks for the question Luke. It's Chris. So we are still assessing.
So we're still looking at all of our options, what our asset base looks like, and where we think we can drive the most value to pay down debt.
Okay, and in your conversations with counter-party, counter parties, if I take a look at the deck here, the net debt toll capital is right close to where your covenant is. If I were a potential buyer of these assets, I would think that you would be coming to the table as potentially a four-seller here considering that you are close to the table.
not at this juncture.
You know, overly concerned about that impacting our ability to monocytes assets. Okay, got it. Last one for me, and then I'll pass the line. It's mentioned in the press release that 40% of the debt is hedged at a blended rate of roughly 2.25% until 2025. What is the rate of interest on...
percentage, and honestly I can pull that up and give it to you, the line is at a more floating rate that we lock in on a rotating basis. So we're in the range of 5% to 6% I believe.
Got it. Okay. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to John .
for any closing remarks. Please go ahead.
for any closing remarks. Please go ahead. Thank you again for joining us today.
But the last several months have been challenging. We are excited about our future. Our working hard to deliver continually improving results.
I believe we have the underlying fundamentals to execute on these plans and look forward to updating you in the next few months on our progress. Thank you and good afternoon or evening depending on your locale. Take care.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.