Winc, Inc.

Good day, ladies and gentlemen. Welcome to the Wink fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. As a reminder, today's call is being recorded. I'd now like to turn the conference over to Mr. Matt Thielen, Chief Strategy Officer and General Counsel for Wink. Mr. Thielen, you may begin.

Thank you, and welcome to Wink's fourth 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 fourth quarter ended in December 31, 2021, that went out earlier this afternoon. The press release is also accessible on the company's website at ir.wink.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 within 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 Exchange Act of 1934. Forward-looking statements include statements concerning our total addressable market, liquidity and capital resources, financial and business trends, the impact of COVID-19 on our business and global economic conditions, our expectations related to acquisitions, and our expected future business and financial performance, and can be identified by words such as believe, may, will, estimate, continue, anticipate, intend, expect, could, would, project, plan, potentially, preliminary, 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 risk discussed in today's press release, our final perspectives filed with the SEC on November 12, 2021, and our other periodic filings with the SEC. During the call, we will also discuss certain financial measures that are not prepared in accordance with generally accepted accounting principles. For more information on our use of these non-GAAP financial measures, including a reconciliation of each to its nearest GAAP equivalent, please refer to our earnings release. 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. It is my pleasure to speak with you today to discuss our fourth quarter and full year results. Following my opening remarks, I will turn things over to Brian. who will give an update on our core brand portfolio. Then Carol will discuss our Q4 financial results in greater detail before we open the call for questions. We are very proud of our performance in the quarter and believe our unique omnichannel platform is driven by a passionate team highly skilled at creating brands and products that consumers love. Our direct consumer channel allows us to market our innovative portfolio and learn from consumer behavior to rapidly and effectively scale these brands across our broader omnichannel platform. We believe this unique approach lays the foundation for amplified wholesale potential and significant long-term growth opportunity, as evidenced by our 107% growth in the wholesale revenue during 2021. Fourth quarter results further demonstrated the strength of our strategy, as we delivered net revenue growth of 4.5% to 18.5 million over the prior year's period. Growth in the fourth quarter of 2021 was driven by a 152% increase in wholesale, which was partially offset by a 7% decline in the direct-to-consumer channel, where we continued to cycle extremely difficult comparisons due to the COVID-driven sales we experienced in the fourth quarter of 2020. However, on a two-year basis, full-year DTC revenues in 2021 increased 82% compared to 2019, reflecting higher average order value as we continue leveraging our strong customer loyalty. As comparisons ease over the coming quarters, we expect our direct consumer business to resume a healthy year-over-year growth trajectory under our current plan. Distribution expansion continues to fuel our wholesale growth as we more than doubled our retail accounts in 2021, adding 9,036 new doors to reach 16,905 at the end of December, including leading chains such as Whole Foods, Target, Walmart, and Trader Joe's. We believe we are just getting started and are a long way from our goal. We will continue emphasizing building our relationships with major accounts with our goal to achieve 50,000 retail accounts within the next several years. Full-year net revenues of $72.1 million in 2021 were up 11.4% over the prior year. This growth was attributed to our continued success in the wholesale channel, where net revenues increased 106.9%. As you have heard, across most other sectors, inflation and supply chain factors, like freight and labor, have created pressure on margins. However, our team has worked very hard to mitigate these impacts as we enter 2022, and we believe we are well-positioned to execute against our strategic priorities, confident in the power of our unique omnichannel platform to drive significant growth in the future. As our portfolio of core brands expands and our organization continues to scale, we believe we will attain continued gross margin improvements. Now, I will turn it over to Brian Smith to discuss our core brand portfolio, wholesale growth, and some things to look forward to in the coming quarters.

Thank you.

As Jeff discussed, our strong portfolio of core brands and expanding wholesale channel continue to propel our overall growth. We define our core brands as those brands that have individually generated more than $1 million in net revenues through the DTC channel and more than half a million through the wholesale channel in the last 12 months. and that we believe have the potential to continue to grow sales through the wholesale channel. In 2021, our core brand, Summer Water, Folly of the Beast, Wonderful Wine Company, Chop Chop, and Lost Poet collectively grew by 47% in case volume compared to 2020, with Summer Water growing an impressive 70%. We believe that continuing to foster relationships with key retailers will lead to future growth across our portfolio of core brands. All of our core brands are sold on the channel and wholesale remains a key area of focus for driving growth and leveraging the power of our brands and platform. We sold more than 200,000 cases in 2021 in the wholesale channel representing approximately 110% growth from 2020. We tripled sales with distributors in California and experienced two to three X growth with distributors and other key market States of Texas, Illinois, and Colorado. supported by launches at retailers like Trader Joe's, Walmart, Target, and continued growth at HEB and Publix. Amongst our core brands, Summerwater continues outstanding wholesale performance with over 70% growth in sales depletions, which refers to the number of cases sold to retailers by distributors and represents inventory pull-through, and 50% growth in points of distribution, which refers to the number of placements in retail accounts. Folly of the Beast, Chop Shop, and Lost Poet also continue to grow in revenue, depletions, and points of distribution year over year. As Jeff shared in 2021, we added another 9,036 retail accounts, bringing the total unique accounts for 2021 to 16,905. We continue to work tirelessly to develop strong relationships with these accounts to build a foundation for long-term growth. As we've shared before, we aim to add more core brands to our portfolio, and Pizzolatto, Les Hautes de la Garde, and Cherries and Rainbows are emerging in 2022 as scalable brands with growing demand. Our innovation pipeline is robust, and we're prepping to launch several new projects this year in search of our next class of scalable brands. This year, we're trying out new formats for our upcoming launch of Dime in a portable, resealable bag format. Not only does this format provide consumers with longer product shelf life, it also reduces the environmental impact of the manufacturing process relative to traditional glass bottles. We have also increased our portfolio's organic offerings and continue to expand relationships with key retailers focused on the organic category. We believe we are well positioned to be a leader in the organic category as our platform and brand portfolio index high with millennial consumers growing demand for more sustainable options that are healthier, naturally produced, and chemical-free. Further investing in wholesale, we appointed Darren Cluse as Vice President of Wholesale at the end of February to further our growth strategy, strengthen our account relationships, and maximize the opportunity in the organic category. Darren has over 20 years of experience, having served previously at E&J Gallo, Diageo, and Constellation Brands. We are very excited to have Darren on board and feel that he will be an integral player in moving this channel forward. Darren will work closely with the executive leadership team to continue Wink's wholesale growth, expanding our footprint, driving velocity of core brands, and leveraging Wink's omni-channel assets across digital marketing, brand innovation, and its distribution networks. Now, I will turn it over to Carol Braul to discuss our Q4 financial results in greater detail.

Thanks, Brian, and good afternoon, everyone. Let me run through our Q4 financials. Net revenues for the fourth quarter were $18.5 million, an increase of approximately $803,000 or 4.5% compared to the fourth quarter of 2020. Wholesale net revenues increased 152% to $3.9 million as we continue to deepen our existing retailer relationships and expand our account footprint by leveraging strong distributor relationships. DTC net revenues decreased 7% to 14.4 million, reflecting lower order volumes partially offset by increased average order value, which was up 9.2% from the same period in 2020. Gross profit was $7.2 million, a 9% decline compared to the prior year period. On a consolidated basis, gross margin was 38.7% compared to 44.5% in the prior year period. Gross margin in our DTC segment was 41.6%, representing a 560 basis point decline as compared to the fourth quarter of 2020. The decrease reflects an approximate 260 basis point impact related to one-time inventory adjustments made during December 2021, an approximate 190 basis point impact related to increased discounted first-time orders, and an approximate 110 basis point impact related to inflation and other factors. We are quite pleased with our team's efforts to minimize impacts of global supply chain constraints and unprecedented inflation. Our agile supply chain improves gross margin in our core brands and focus on operating efficiencies provided the leverage needed to navigate these headwinds. In wholesale, gross margin was 27.5%, a significant improvement from the 13.3% gross margins in the fourth quarter of 2020 due to product mix as the company began to realize scale-related efficiencies for core brands. For the year, we were able to improve gross margin in the wholesale channel from 29.1% in 2020 to 38% in 2021 and from 40.7% to 41.8% for the business overall. We anticipate continued margin improvements in 2022 as our high margin core brands continue to scale and we achieve additional operational efficiencies. Total operating expenses increased to 3.6 million or 35.6% to 13.8 million. Most of this increase was attributable to growth related initiatives and costs of operating as a public company of which approximately 0.3 million related to one-time IPO costs. Marketing expenses increased 0.2 million, or 4%, versus last year, reflecting higher customer acquisition costs. Personnel expenses rose 0.9 million, or 43.6%, to 3 million, primarily attributable to a 0.3 million increase in stock-based compensation expense and a 0.6 million increase in expenses related to increased headcount to support functions as we grow our business. Net loss for the fourth quarter of 2021 was 5.6 million or 73 cents per fully diluted share. And this compared to a net loss of 1.9 million or $2.10 per fully diluted share in the fourth quarter of 2020. Adjusted EBITDA loss for the quarter was 5.9 million versus a loss of 1.5 million in the prior year period. The company incurred stock-based comp expense of 0.3 million and income from the change in fair value of warrants of 1 million. This decline in adjusted EBITDA of 4.4 million was primarily attributable to increases in personnel and other GNA charges as we continue to build our team for high growth and support public company operations. 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 17.7 million after deducting underwriting discounts and commissions and other offering expenses. At the end of December 2021, we had cash and cash equivalents of $4.9 million and no outstanding borrowing. Now I'll turn the call back to Jeff for closing comments.

In summary, we remain focused on building our portfolio of brands and continue investing heavily into omnichannel growth through innovation, digital marketing, partnerships, wholesale excellence, and deepening relationships with leading chains. We're continuing to drive for increased wholesale scale as we believe this is where the majority of Wink's growth will come from in the future. We believe the IPO strengthened our balance sheet, allowing us to close out long-term debt positions and invest in inventory. Because of current trends, we are focused on driving toward profitability while continuing to position for growth through optimizing working capital investments and operating leverage. We believe our current balance sheet position, available credit facility, and potential access to additional credit provide sufficient liquidity for the company to achieve profitability in the coming years. With that, we are ready to open the call to your questions.

And 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. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question comes from the line of Bobby Burleson with Canaccord. Please proceed with your question.

Yeah, thanks for taking my questions. So, uh, I guess the first one is, um, just trying to understand the potential of summer water, uh, in terms of annual cases, you know, maybe give us some examples of, you know, successful wines that have had staying power and, you know, really captured consumer interest, um, where you kind of see, you know, that you kind of see as relevant for summer waters potential.

Yeah, thanks, Bobby. Brian, I'll turn it over to you to answer that one. Great, thanks.

Yeah, we're seeing significant growth in summer water, up over 70% last year. And we're seeing pull-through still at a relatively low ACV, which is account penetration. So we're seeing strong velocity and less penetration. than is available for us. So this is a very strong signal for the brand and indicates that as we continue to expand our wholesale footprint, we'll continue to see growth in this brand. I think the 50,000, 100,000, 150,000 case thresholds are where you see long-term durability, and we are well on our way to achieving that.

Okay, great. And then I think you mentioned organic now is 20% of your portfolio. What's the target there? Do you guys have a target, or are you kind of letting the market determine that? I'm kind of curious what the market's telling you that that could ultimately be.

Yeah, we see organic as a huge opportunity, and in fact, wine intelligence indicated that this is the highest opportunity type of wine for younger consumers. Also, Insight Partners, another reference, is projecting it at 11.6% CAGR. So we have grown significantly in this category, and really we're growing with the market. We're seeing increased demand from chain buyers as well as consumers online around this category. And as customers seek better-for-you options in every category, we believe that we're uniquely positioned for growth. So we don't have a target, but we do see growth. a long-term scaling opportunity for this category, and we're positioned well to take advantage of that.

Okay, great. Are there any implications for your wholesale margins from a higher mix of organic, or is it kind of similar to the rest of your portfolio or lower? Just what are the mix implications, I guess, of that business?

Sure. We have seen supply chain issues impact natural merchants' portfolio, which is case goods in the organic space. We've seen some margin compression and delays due to increased freight costs, but we are working against this through price increases and investment and inventory to avoid out-of-stocks. So it's something we're proactively working on and see an opportunity to make improvements there.

Okay, and I just want to do –

Bobby yeah yeah we summer water and the high growth of that brand is really offsetting a lot of the impacts of that so we expect the overall risk yeah you expect margins to continue to improve I guess on wholesale and then just one last one for DTC when do you anniversary you know some of these tough comparisons you know and and what kind of long-term and I got investing heavily in that business from a growth perspective, but what do you think kind of the long-term growth potential is for DTC once you're dealing with kind of normal year over year comps?

Yeah. Yeah. I think, you know, there's, there's a lot of factors going into that. You know, and really for us, it's about discipline return on, um customer acquisition costs and you know as we've heard from the last year we've got sort of you've got difficult comparisons but in addition to that you've got um you know a lot of the data changes that that ios 14 came out with and just challenging media markets and i think you know we as a company really benefit from the fact that we can lean into our omni-channel strategy and invest into the channel where we're going to see the highest return on invested capital and and that's really what we're doing and and the great growth that we're seeing in wholesale And as that business continues to scale, it allows us to continue to just be very disciplined in the direct-to-consumer chain. So we'll take advantage of opportunities in the media market to continue to add customers, but we'll really lean into the balanced profile of our business. And so the COVID comparisons will begin to ease in Q2 and beyond this year, but we'll just continue to be disciplined in payback and return on invested capital in the media markets. And then, you know, we're seeing such great returns in the wholesale channel, we're investing heavily there. So that's balancing out the growth of our business. And ultimately, as wholesale continues to become a greater and greater percentage of our revenue, you know, that will really impact our top line revenue growth. And we expect that to continue to pick up momentum over the coming quarters here and certainly into 2023. Okay, great. Thank you.

And again, as a reminder, if anyone has any questions, you may press star one on your telephone keypad and doing so will ensure your spot in the Q&A queue. Our next question comes from the line of Barry Stein with Spartan Capital Securities. Please proceed with your question.

Hey, good afternoon, folks, and congratulations on the quarter. I want to ask, continuing that prior conversation, about the trade-off between DTC and DTC margins. And I know in the quarter you called out, you gave some first order discounts, giving up some margin in that business to build a brand so that you can present it into the wholesale market. What's the trade-off and the synergies between DTC and wholesale?

Yeah, I don't think we really see – so, you know, discounts on first orders are common and have been common for our business really since inception. That's how we go out and acquire new customers that we can market brands to. And in Q4, we just see an influx of a lot of new customers, and that's been the trend really since – since we founded the business 10 years ago. And so really it's about getting new customers into our ecosystem so that we can get data and then market to those customers, and we have that customer list. So we don't really see a tradeoff, you know, between DTC and wholesale as far as, you know, as far as we really see them as a holistic business. benefit where the DTC channel provides marketing and velocity in the wholesale channel or ultimately into the wholesale channel. And so the only thing that I'd say is a trade-off is, you know, where we're going to put invested dollars. And in 2020, we saw incredibly inexpensive customer acquisition costs. So we invested more into the direct-to-consumer channel. In 21, and what we see is that the future of the market is really using the direct-to-consumer channel to market our brand's and come up with new brands to provide into the wholesale channel. And so it's the holistic relationship between the two, not necessarily a trade-off. But, of course, there's limited resources, and we have to make a decision where we're going to put our limited resources. And right now we're investing more into the wholesale channel than into the direct-to-consumer channel.

And then on acquisitions, you talked a little bit about acquisitions. You know, your first one, Natural Merchants, I think you'd agree, was a home run. Got, you know, nice foothold in organic, some very nice products. What's the outlook out there? What I hear from some other companies is when they go out to look at acquisitions in this environment, the valuations that sellers are looking for may be a little bit too high. Do you still see good opportunities? Can we expect one or two acquisitions during the course of calendar 22?

Yeah, we're seeing that same thing out in the market. And really, we believe that we've got a great organic growth strategy. We've got great brands in our portfolio. Wholesale is growing at a really nice clip. And direct-to-consumer is really providing the opportunity for the wholesale channel to really grow fast. So we believe in our organic strategy. With our current balance sheet and the current market out there, we are more focused internally than externally, for sure. But, you know, that could change very quickly here. So we're just going to remain disciplined, focus on building a great business here, and ultimately when the right acquisitions come along, we'll take a look. But as of right now, you know, we're not committing to one or two or really, you know, any acquisitions. It is part of our long-term growth strategy. But I think, you know, in the year of 22, we're going to focus on, you know, just our organic growth strategy.

And then a financial, if I could turn to a financial question. You talked about adequate liquidity to get you to profitability over the next several years. Could you go into a little bit more detail? What are the levers and what should we look for to get the company to break even and then positive EBITDA? And I don't know if you want to speculate on a timeframe as well.

Yeah, so we're not providing a guidance on timeline, but we are focused on moving the business towards EBITDA positives. Certainly, I think the market is telling us that we're in a very nice growth market over the last few years. And now, as the market tightens, as we see rising interest rates, we, of course, have to be more focused on moving towards even a positive. And so we continue to find efficiencies in the business, and really, we continue to hit our strategic plan. So we've shifted focus to organic growth, as I just mentioned, and are being incredibly disciplined in spending to reach EBITDA positive as quickly as possible while maintaining momentum and investment into our brands and new products. Primary amongst these cost efficiencies is a greater discipline in the DTC marketing spend, as I discussed earlier, as well as corporate operating expenses. So we're really focused on using our current balance sheet to take us to EBITDA positive, and we believe that we can accomplish that while maintaining momentum on our key strategic initiatives that will continue to drive growth.

And my last question, at the end of the earnings release, you have a table where you give some operating metrics, and under wholesale, you give the number of retail accounts, which was 8,720 for the fourth quarter, and then 16 905s you called out for the full year. Could you explain what those metrics mean, and then how valuable are they as forward-looking metrics to gauge growth going forward. That $16,905 looks like a pretty healthy number.

Yeah, we're really excited about our account growth last year. I think it's a great leading indicator of overall growth in the wholesale channel. But it's really three driving factors that ultimately are going to drive growth in the wholesale channel. It's doors, velocity of product, and number of SKUs per door. But because we're so underpenetrated, a key number for us is growth in retail doors. And so that should provide us with great opportunity for future growth as we build those opportunities and ability as we build those relationships to launch new products into those accounts as well. And that's really the trend that we've seen with Whole Foods as we've continued to build the relationship with them over the past six years. And so our hope is that we can replicate that into lots of the other large retailers that we mentioned going into last year.

Okay. Thank you very much for taking my questions.

Thanks very much, Barry.

And our next question comes from the line of Alex Furman with Craig Hallam Capital Group. Please proceed with your question.

Great. Thanks very much for taking my question. You know, it sounds like your core brands are performing very well, while at the same time your model for spinning out new brands continues to work well. So, you know, you talked about, Jeff, kind of the tradeoff between investing in the direct-to-consumer and the wholesale channels. Can you talk about how you think about continuing to invest in innovation and new brands, knowing that you've had success developing new brands for not a lot of money, you know, balanced against leaning into your brands like Summer Water that you know are working, where you know you're going to get a near-term return? How do you kind of balance the near-term and future growth? And where should we expect to see most of your resources deployed this year?

Yeah, I'll take the first part of that question, Alex, and then I'll turn it over to Brian to speak a little bit more to it. So, you know, the Wink.com platform is really built around – you know, customer discovering new products. And so we're continually in sort of the operating of that business is really built around innovation and launching new products. So it's really core to our DNA to do that. And so it's not as much of a tradeoff as, you know, say, like, you know, where we're getting the best return on invested capital as a business. you know, we're going to continue to innovate as it's just who we are. So we're not looking at sort of pulling dollars from one area to another. With that being said, we have made a lot of improvements to our innovation function over the last 12 months, and I'll turn it over to Brian to talk about, you know, what we've been doing and some of the future outlook that we're looking for this year.

Yeah, thanks, Jeff, and thanks for the question. Yeah, we're extremely excited about our innovation process. pipeline, and we've got a number of products in that pipeline that are coming out. Really exciting for us is some category expansion. So we are moving into non-alkaline products. We have an organic non-alkaline called Good Twin that we'll be launching. An exciting category, a smaller category, but certainly seeing a lot of growth with younger consumers. We mentioned alternative packaging in our dime project that we're launching. And then we're also expanding into RTDs. And in this case, we have formulated and are finishing a brand for a wine-based margarita and mimosa in a single-serve format. And we really think there's a big opportunity in RTDs. We're not going to be competing with some of the seltzer brands, but we do believe an omni-channel strategy that leverages digital first is an exciting way to build a brand in a really exciting category that is really yet to go through premiumization. So we continue to have a robust funnel. And as Jeff mentioned, we've made improvements to our team that's focused on this area of the business. And as you said, we've seen the results from our innovation function, our ability to test and market online. and then scale in wholesale. So it's a key strategy for future growth for us.

Okay, that's really helpful. Thank you. And then I wanted to ask about the direct-to-consumer channel. I think you mentioned in the prepared remarks that, you know, after a couple quarters of, you know, really extraordinary comparisons that you were lapping during the worst of the pandemic, you know, you were looking to get that channel back to growth. This year, you know, in the fourth quarter, that channel was essentially flat. I mean, down a little bit, but basically flat. I mean, are you kind of getting to that inflection now where, you know, you feel direct-to-consumer is ready to start growing or, you know, with Q4 maybe a little bit of an anomaly and we're still maybe a couple quarters away from that inflection?

Yeah, I think, Alex, we're a couple quarters away from that inflection. I think we're still continuing to focus on wholesale. And as I mentioned, the media markets have been maybe almost equally as volatile as the overall markets. And so we're just going to focus on a disciplined return on customer acquisition and then focus on growing our core brand portfolio and launching new great products. And ultimately, we believe long-term, the market will get back to growth. But, you know, that's really how we're thinking about it.

Okay. That's really helpful. Thank you very much.

And we have reached the end of the question and answer session. I'll now turn the call back over to Jeff McFarland for closing remarks.

We really appreciate everyone joining us on today's earning call. Thanks for all the hard work from all the employees at Wink and So we're really excited about the future here, and thanks for everyone taking the time today.

And this concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.