Winc, Inc.

Greetings and welcome to WINK Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Matt Thielen, Chief Strategy Officer and General Counsel. Thank you, sir. You may begin your presentation.

Thank you, and welcome to WINK's third quarter 2021 earnings conference call. Joining me on today's call are Jeffrey McFarland, our CEO, Brian Smith, our president and chairman, and Carol Brault, our chief financial officer. In a moment, you will hear brief remarks from all three, followed by a Q&A session. By now, everyone should have access to the earnings release for the third quarter ended on September 30th, 2021, that went out this afternoon at approximately 4.05 Eastern time. The press release is also accessible on the company's website at ir.winc.com. And shortly after the conclusion of today's call, our webcast will be archived on the website for the next 30 days. Today's call will contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Forward-looking statements include statements concerning our total addressable market, financial and business trends, the impacts of COVID-19 on our business and global economic conditions, our expectations related to acquisitions, our expected future business and financial performance, and our guidance, and can be identified by such words as believe, may, will, estimate, continue, anticipate, intend, expect, could, would, project, plan, potentially, preliminarily, likely, and similar expressions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or achievements reflected in the forward-looking statements will be achieved or will occur. Any forward-looking statements made herein speak only as of today's date, and you should not rely on forward-looking statements as predictions of future events. Except as required by law, we undertake no obligation to update any of these forward-looking statements for any reason after the date of this call or to conform these statements to actual results or revised expectations. Forward-looking statements, by their nature, address matters that are subject to risks and uncertainties that could cause actual results to differ materially from expectations. For discussion of the material risks and other important factors that could affect our actual results, please refer to the risks discussed in today's press release our practice filed with the SEC on November 12, 2021, and our other periodic filings with the SEC. During the call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe that these measures provide useful information about operating results. enhance our overall understanding of the past performance and future prospects, and allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. For more information on the non-GAAP financial measures, please see the reconciliation tables provided in our press release, dated December 8, 2021. Further, throughout this call, we provide a number of key performance indicators used by our management and often used by competitors in our industry. These and other key performance indicators are discussed in more detail in our press release. With that, I will turn the call over to Jeff.

Thank you, Matt, and good afternoon. We really appreciate everyone joining us today to discuss our third quarter results. Following my opening remarks, I will turn things over to Brian, who will discuss the impact our acquisition of certain assets of natural merchants has had on our company performance and some details on the growth of our core brands. Then Carol will discuss our Q3 financial results in greater detail before we open the call for questions. Wink designs, produces, and sells innovative beverage brands that enhance life's everyday moments. Our entire team at Wink has a true passion for creating products that consumers love. We do this through a modern path to the consumer on our direct-to-consumer DTC platform, where we can market our portfolio of products and then scale these brands in our wholesale channel. We believe that we are the only omnichannel platform at scale in the alcohol industry. Each of our current core brands has individually generated more than $1 million in net revenues through the direct-to-consumer channel and more than a half a million through the wholesale channel in the last 12 months, and we believe has the potential to continue to grow sales through the wholesale channel. Our five core brands are testament to the efficacy of this process, driving overall growth in the quarter. First, I'll touch on our performance and outlook for the remainder of the year. We are pleased to report third quarter results that met the high end of the preliminary ranges we shared in our prospectus prior to completing our IPO in November. Q3 net revenues increased 3.4% to $18.5 million, driven by a more than doubling of wholesale revenue, which offset anticipated normalization in the direct-to-consumer channel where we were cycling last year's surge due to COVID. On a two-year basis, compared to the third quarter of 2019, our total net revenues were up 111%. Through the nine months of 2021, our net revenues totaled $53.6 million, up 14% compared to the same period in 2020. Our core portfolio of five brands continues to grow, which we believe is the best indicator of our long-term performance. Our core brand cases grew to 44,797 in the third quarter of 2021, a 34% increase over the prior year period. We continue to see strong performance from Pizzolatto, Les Hautes de la Garde, and Cherries and Rainbows, each of which we expect will become core brands by the end of 2022, adding to our five existing core brands and bringing our total core brand portfolio to eight. Summerwater continues to see strong overall sales and retail placement growth. Of all rosé wines reported on in the Nielsen Wine Report, Summerwater has the fourth highest sales growth rate and the second smallest ACV, indicating that the brand is underpenetrated relative to all other rosé wines and has tremendous runway through door expansion, especially considering its highly competitive growth rate at existing placements. The wholesale channel has been extremely strong throughout 2021, attributable primarily to our ongoing initiatives to expand distribution. Our wholesale revenues increased 106.9% in the third quarter of 2021 compared to the third quarter of 2020, 96.4% in the first nine months of 2021 compared to the same period in 2020, and 200% on a two-year stack basis. We launched our products. in key retailers, including Target, Walmart, and Trader Joe's, rapidly expanding the number of locations where customers can find our products. We continue to foster relationships with our existing partners, including Whole Foods and Kroger, increasing the number of products from our portfolio these retailers carry, as well as driving higher velocities. In Q3 of this year, our DTC revenues declined by 12.8%, but on a two-year stack basis, increased by 85%. Q3 2020 provided a difficult comparison quarter as the quarter was heavily impacted by surging demand related to COVID. A year ago, we saw pantry stocking, closed liquor stores in many states, and a huge influx of first-time e-commerce purchasers that did not fully embrace online purchasing once in-person retail opened back up. While we are facing similarly tough comparisons in DTC over the near term, current trends are in line with our expectations. We expect year-over-year growth to accelerate starting in Q2 of 2022 as the comparable period normalized post-COVID. The DTC channel is providing great data and marketing on our creation and innovation of new products and brands. We have some exciting product innovations and launches planned over the next year, and we will test in the DTC channel driving consumer engagement and consumer acquisition while we refine these products for broad distribution in the wholesale channel. We have invested in our engineering, marketing, and data science team, and we expect these investments to pay off in 2022 through improved gross margins, customer retention, and our direct-to-consumer channel delivering steady growth. Now I will turn it over to Brian Smith to discuss our acquisitions and some things to look forward to in the coming quarters.

In addition to building share through our organic growth strategy, we continue to explore strategic acquisition opportunities. Our acquisition strategy allows us to add great brands or capabilities to our company while providing additional scale. Our May 2021 acquisition of certain assets of Natural Merchants is already proving to be highly accretive to our overall business performance. Natural Merchants is a leader in organic wine in the US. The acquisition brings incredible relationships with suppliers in France, Italy, and around the world that have been building the organic category for the last 15 years. Our internal data indicates that organic, sustainable wines are in high demand with the next generation of consumers. This acquisition has provided wholesale breadth as well as scalable, high-quality organic sourcing capabilities we can leverage both online and off. As better-for-you options continue to gain market share in every consumer category, we believe that we are well-positioned to be a category leader in this exciting area of the wine market. The acquisition of certain natural merchants' assets helps support our rapidly expanding wholesale channel, which focuses on organic and sustainable products. These are extremely important categories with today's consumers, with the U.S. organic wine sector projected to have a CAGR of 11.6% from 2020 to 2027, according to an industry report by the Insight Partners. Through these new supplier relationships, we plan to bring over 10% new organic SKUs to the digital channel in the coming year, and we expect several of these SKUs will mature into core brands over the next several years. We believe these products, along with Wink's marketing, will help us innovate the leading brands in this important category and ultimately expand the organic sector with younger consumers. We aim to become a category leader over the next several years. Now I'll turn it over to Carol Brault to discuss our Q3 financial results in greater detail.

Thanks, Brian, and good afternoon, everyone. It's my pleasure to share Q3 financial updates. Net revenues for the third quarter were $18.5 million, an increase of approximately $609,000, or 3.4% compared to the third quarter of 2020. DTC net revenues decreased 12.8% to $12.7 million, as operations began to normalize after a 160% increase in the prior year period, driven by COVID-related factors. We continued to experience strong trends in average order value, with third quarter AOV up 15% year over year to $74.52. Wholesale net revenues increased 106.9% to $5.5 million, as we continue to make solid progress on our initiatives to drive volume by gaining additional shelf placements with existing customers and expanding distribution with new and existing customers. In the third quarter, the number of retail accounts increased by over 53% to 11,476, including significant growth with key national operators such as Target and Walmart, as well as high growth in independent retailers. Gross profit was $7.8 million, a $258,000 or 3.4% improvement compared to the prior year period. On a consolidated basis, gross margin was 42.3%, consistent with the year earlier level. Gross margin in our DTC segment was 43.8%, a 30 basis point improvement versus a year ago as discounted first time orders decreased and through strategic sourcing initiatives positively impacting product costs. In wholesale, gross margin was 38.1%, a significant improvement from the 31.9% gross margins in last year's third quarter. driven by scale-related efficiencies propelled by our recent rapid growth. Our unique omnichannel business model provides strong line of sight into our cost of goods and relative flexibility in terms of pricing decisions. Our increasing AOV, growing scale in core brands, and strategic sourcing initiatives continue to provide margin expansion, which we expect to continue for the foreseeable future despite macroinflationary pressures. Total operating expenses increased by $5.3 million, or 61.3%, to $14 million, in line with our expectations for the quarter. Most of this increase was attributable to growth-related initiatives and going public costs. Marketing expenses were down 1.1 million or 23.3% versus last year, reflecting a more normalized growth environment in Q3 2021 versus COVID-fueled 2020. Personnel expenses rose 5.1 million or 248.1% to 7.2 million, primarily attributable to a 700,000 increase in stock-based compensation and $3.5 million of additional compensation expense related to the forgiveness of promissory notes issued to executives in connection with the exercise of stock options. Additionally, $700,000 of the increase was due to increased headcount to support functions as we grow our business. Net loss for the third quarter of 2021 was $5.7 million or $2.55 per fully diluted share. And this compared to a net loss of $1.3 million or $1.49 per fully diluted share in the third quarter of 2020. Adjusted EBITDA loss for the quarter was $1.4 million versus a loss of $979,000 in the prior year period. The company incurred stock-based comp expense of $819,000 and income from the change in fair value of warrants of $248,000. This decline in adjusted EBITDA of $376,000 was primarily attributable to increases in personnel and other G&A charges as we continue to build our team for high growth. At the end of September 2021, we had cash and cash equivalents of 1.6 million and debt of 6.7 million. Subsequent to the end of the third quarter, we completed our initial public offering in November, selling 1.7 million shares at a price of $13 per share, generating net proceeds of approximately 17.9 million after deducting underwriter discounts and commissions and other offering expenses. With this transaction, we expect to have gained enough liquidity to execute on our three-year organic growth strategies in both the DTC and wholesale channels. Looking ahead, we expect year-over-year net revenue growth rates to improve as we cycle more normalized periods not impacted by COVID. We expect the wholesale channel to outpace direct to consumer growth over the immediate term as a result of strong relationships with our retail partners and continued focus on the channel. In addition, we expect further gross margin improvement as our core brands continue to scale and as our product portfolio continues to shift to more international wines with lower raw material costs. And now I'll turn the call back to Jeff for some closing comments.

In summary, the business is performing well, and we are excited about the growth of our core brand portfolio, our innovation pipeline, the early performance of the natural merchant assets, and our ability to continue to scale the wholesale channel. The success of our first acquisition serves as evidence for our thesis that our industry-leading omnichannel growth platform, along with the National Wholesale Distribution Network, uniquely positions us for inorganic growth and with a robust existing acquisition pipeline, we plan to execute on additional transactions in 2022. We believe that our track record of consistent execution and growing a unique omni-channel platform by innovating on products that consumers love will be our source of future growth, driving value for all stakeholders. We will continue prioritizing investing in innovation and growing our core brands, augmented by the pursuit of complementary, strategic, mergers and acquisitions. With that, we are ready to take your questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. Confirmation to indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we pull for questions. Our first question comes from the line of Bobby Burleson with Canaccord. You may proceed with your question.

Yeah, good afternoon. Thanks for taking my questions. So congratulations on your first public quarter. Sounds like you guys tracked to the high end of the range you were expecting. Can you maybe unpack like what drove results above kind of the midpoint of your internal plan if there are a few highlights there?

Yeah, yeah. Thanks, Bobby, for joining us today. This is Jeff McFarland. You know, overall, I think it was general positive performance on the direct-to-consumer channel, you know, retention and overall orders from current customers that really drove, you know, higher-than-expected results, which we were very happy to see, and wholesale really came in right in line with our expectations.

Okay, great. And then just switching gears like to wholesale and the organic and sustainable wines that you guys have onboarded and are expecting to onboard more of. I'm curious how that's helping with door expansion and discussions with retailers.

Thanks, Bobby. It's Brian Smith, President. You know, we see from our own internal data, as we mentioned, an increasing demand for sustainability and also organic products. And I think you see that across every consumer category as younger consumers seek better for you options. You know, we now have scalable supply rate relationships and are working on brands to meet this consumer need. And we've become specialized leaders in the organic space. We mentioned the growth rate. this category, it's also the highest growth rate with younger consumers. So we're active in conversations and we see expanding sets in retailers in the organic wide space in the future, and we're positioned to capitalize on that.

And Jeff McBride here, just to add on that, we've got some exciting launches coming up that we talked about in the S1. The supplier partners that we picked up from the natural merchants acquisition are delivering us some incredible raw material that our branding team is putting together and our large distributors as well as many of the large retail partners were in conversations and partnerships to launch many of those brands in the first part of next year. So we'll be excited to announce those and really the acquisition provides us with some really exciting growth opportunities on some new products as well.

Great. And you guys have done a good job with procurement of bottles and other kind of things that might trip folks up given supply chain volatility. Any update on what you're seeing in the supply chain dynamics out there and how they even things like labor and how they might be affecting shelf resets, you know, kind of exogenous factors like that?

Hi, Bobby. This is Carol . Thanks for the question. Yeah, our product team, fortunately, was able to get out ahead of some of the global supply chain issues. And we were able to procure glass early, and we have sufficient supply to get us through our spring bottling. So we're very well positioned there. additionally you know we we've had a really great harvest season and we were able to procure wines you know as we know as you know we can pivot and procure from anywhere in the world so we've been able to bring in great quality wines across the world and we are very well positioned on that end as well on the labor front we're doing well we have no significant issues whatsoever And I would say probably our biggest challenge is our wholesalers and scheduling freight to pick up their orders in our warehouses. And so we're partnering with them and assisting them with that challenge.

Okay, great. And one last quick one. Just curious on – it sounds like you're online outperformed for you guys a little bit. What are you guys doing to kind of shore up and – enhance customer service there? Are there any internal initiatives to make sure that customer service is as good as you want it to be?

Yeah, absolutely. As we mentioned in the earnings script here, we're really investing in the engineering, data science, as well as the customer service team. We've definitely... seeing that there's some opportunities for some wins there. And the team we've invested in is working down the list. And I think we'll see some significant improvements. From a cohort performance basis, we've seen increased retention and increased performance of cohorts. So it's not negatively impacting You know, we've continued to see each year-over-year cohort over the last three years perform better than the previous cohort from a spend and retention basis. But I think what it really shows is that there's lots of opportunity for us to continue to improve. And with the investments that we've been making and are making on a go-forward basis, I think we'll see continual improvements in that. You know, we do rely on FedEx and UPS for for shipping, and there are certainly delays out there that are compounding some of those issues right now, but we've continued. In addition, I'd say the last key metric that we really follow is NPS, and we've increased our NPS by over 30% this year, so we're seeing happier customers spend more and stay retained longer.

Great. Thanks for taking my questions. Congratulations.

Appreciate the questions, Bobby, and thanks for joining the call today.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Jeffrey McFarlane for closing remarks.

We're really excited about the progress Wink's made, being public and completing our first earnings call today. We really appreciate everyone, employees, investors, and customers that have supported us to get us to this date, and we believe we're just getting started. So thanks so much for tuning in today, and we look forward to continuing to grow Wink alongside everyone that's with us here today.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.