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spk01: 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 four on your telephone. If at any time 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.
spk00: Thank you, Operator, and thank you all for joining us today to discuss New Age's third quarter 2021 financial results. I'm here today with Brent Willis, Chief Executive Officer of New Age, and Kevin Banyan, Chief Financial Officer. On today's call, Brent will provide an overview of the operations and progress against our strategic initiative, and then Kevin will provide a summary of our financial performance before we open it up to analyst questions. I'd like to remind everyone that this conference call may contain forward-looking statements reflecting management's current expectations regarding future results of operations, economic performance, financial conditions, and achievements of the company. Forward-looking statements, specifically those concerning future performance, are subject to certain risks and uncertainties. Factors that could cause these results to differ materially are set forth in our annual report on Form 10-K, and an R10Q filed with the SEC. Any forward-looking statements that we make on this call are based on our assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and 10Q, which are available on our website at newage.com. I'd now like to turn the call over to Brent Willis, our Chief Executive Officer. Brent?
spk03: Thank you, Lisa. And as an aside, I am so excited that you're a part of the company and excited about the contributions you're going to be making for both the company and for our shareholders. So good afternoon, everybody, and thank you to everyone for joining the call today. On 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 in 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 full points to 66.3%. And adjusted EBITDA also improved by almost 50% versus last year. And achieving these results in the context of everything going on in the world while we are in the midst of acquisition integration and all of its associated complexities is not easy. Not only that, because we are managing our business to deliver sustainable and consistently growing EBITDA over time, we have had to make some decisions that may impact our results in the short term. but which are essential to building our foundation and providing a springboard for growth. And in the third quarter, we made some of those decisions for the long term, especially in the upgrade and integration of our systems across all partner companies, making a number of cost reductions to improve SG&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 example, the one time system integration had a negative impact on revenue. Also in the third quarter, our China business was negatively impacted by the industry changes enacted by the PRC government, and Japan continued to feel the effects of the government sanction from last year. On the flip side, We saw good growth in a number of geographies around the world as these markets began to get back to work following COVID shutdowns. 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 and 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. So looking ahead, we believe the systems upgrade and most of the merger integration items that impacted the top line in the quarter are one time in nature and largely behind us. but we still have a few open items to complete. We are, however, encouraged by improving top-line growth trends in the fourth quarter. Underlying demand is strong, evidenced by the metrics of our brand partners, and we anticipate sequential organic growth in Q4 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, our lead times and costs on many of our raw materials, production, and shipping have all increased, like virtually every other CPG company in the world. Kudos to our operations team, however, who have managed through the complexities like chance. As a result, though, we have had to hold higher inventory than planned, and this has a cash cost to us, but our redundancies that we have built into our supply chain are proving to be robust. But when we look at 2022, these actions are going to be even more critical, as 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 Mainz, Germany, European warehousing and establishing more operations locally in both the Netherlands and 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 will 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. Our R&D team has been relentless in developing a pipeline of healthy, functionally differentiated brands that are as efficacious as they are safe. and many of which have important benefits that, frankly, approach the boundaries and historical turf of big pharma. For example, our scientists discovered that our Tahitian noni juice inhibits the ability of spike proteins to bind to human cells, adding to the long list of health benefits guarded from this incredible superfruit. And we're excited to have recently launched Our Lucem 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 our 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 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, our investors, of course, but also our associates, our 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 Jen Grafton as our new general counsel, Lisa Muller as 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 Haas, who recently announced his retirement after four years of dedicated service to the company. Tim 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's now 75, and we have had just about enough of each other. He will be sorely missed, however, both personally and professionally, but deserves all the credit in the world as a fantastic end tough board member as a leader and as a personal mentor. Personally, Tim, thank you. As we evolve our board and as we strengthen our leadership team and team of dedicated and impassioned brand partners, we have a tremendous amount of confidence with an increasingly 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'll now turn it over to Kevin to review our third quarter results in more detail. Kevin?
spk05: Thank you, Brent. And good afternoon from our global world headquarters in Denver, Colorado. I'll start by discussing our financial results for the third quarter, followed by comments on our balance sheet. Please note that all comparisons are year-over-year unless otherwise noted. We will also be discussing non-GAAP results, and a reconciliation of non-GAAP financial measures is included in our earnings release and 10-Q. On a consolidated basis, 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 acquisitions of RX and Aliven. 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 our year-over-year growth, with revenues growing 54% in China, 24% in Japan, and 16% in the US, 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 Oliven, and also margin enhancement activities. Overall gross margin percentage increased from 59.8% to 66.3% due to the positive impact of higher sales mix from RX and Oliven, which carry a higher gross margin than our legacy DSD segment. The increase was also partially upset by higher freight costs. SG&A increased from $28 million 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. Our long-term target for SG&A remains at 25% of net revenue. As Brent mentioned, we made excellent progress in the third quarter, making improvements to our cost structure. 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 2020 to a loss of $4.4 million this quarter. Included in adjusted EBITDA are two non-cash items, a $9.8 million gain for the forgiveness of PPP loans, and a $16.2 million impairment charge for the write-off of the non-compete 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, 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 of total cash and $18 million of debt. We've 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 as COVID transitions from pandemic to endemic. We expect to be able to provide guidance for the year 2022 when we report fourth quarter earnings in march in the meantime as we are six weeks into the fourth quarter our revenues are trending 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 1.67 million shares which was approved by shareholders in may the second tranche is the 12-month payout owed to the RX shareholders as part of the merger agreement, which is set at a target of 25 million shares. The actual number of shares to be granted will be dependent upon finalization of working capital adjustments. Both tranches 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 from our analysts.
spk08: Thank you. All right, and ladies and gentlemen, if you would like to register for a question, you can do so by dialing 1-4. That's 1 followed by the 4 on your telephone keypad right now. Now, you're going to hear three tones to acknowledge your request. and if your question has been answered and you would like to withdraw your registration, you can do so by dialing one followed by the three. All right, once again, so to queue up for questions today, it's one four, that's one followed by the four on your telephone keypad right now.
spk06: Our first question is coming from the line of Mike Grundahl from Northland Securities.
spk08: We now proceed.
spk07: Hey guys, this is Luke on for Mike. Wondering if you guys could talk a little more on geographic performance during the quarter and any assumptions going forward in any specific regions as far as continued disruptions or rebounds you expect. And then secondly, wondering if you guys have any updates on the M&A front. I think last quarter you guys mentioned you're 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 out the core platforms organically.
spk03: Yeah, great question, Luke. Thank you. It's Brent here. On the geographic side, one of the scourges and benefits of being in 75 markets is 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 work through those issues, and we think we're working through both of those issues there and adjusting our business models and rolling out our social selling tools in China, and integrating our businesses, including our newest business there, Aliven in Japan, we see renewed growth in those markets Europe continues to grow well for us and as does the Americas. So it is a combination of puts and takes, but we do see growth opportunities across all of our geographies. And to the second point of your question, whether organic or external growth, we still see a whole wealth of opportunities out there. You know, 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 Noni, Zenoa, Mavi, Limu, and Aliven together, right, which in acquisition integration timing is a very short period of time. We're still in acquisition integration mode to deliver the cost 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 and compensation costs in the quarter. Those are all benefits of the merger. And we're well in excess, I would say, of the initial synergies that we committed to shareholders to achieve from that combination. So, you know, we spent this year really on acquisition integration and I would say as it relates to external growth for the right price, primarily using debt because we don't believe that we can use our equity at this price for acquisitions in any significant measure. We think that as those opportunities come around to add scale and reduce SG&A, they've got to really deliver for us financially on those two fronts. We'll definitely look at them, but there is a whole host of opportunities out there of 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 definitely look at those.
spk07: 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 your guys' expectations, and is that you guys still planning on growth from that segment?
spk03: Yeah, I would say, look, we communicated that we would deliver at least $20 million in cost synergies. And I would say that we're at least 30% ahead of target. And we committed that that would happen and accrue to the P&L over a 12 to 18 month period of time. Nine months in, we have visibility to at least 30% improvement on that number, and we expect that to fully materialize 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.
spk06: Got it. Thanks, guys. I'll hop back in the queue. Our next question today comes from the line of Sean McGowan from Roth Capital Partners.
spk08: You may now proceed.
spk02: Thank you. Can you hear me okay? Hey, Sean. Oh, good. Thanks. Can you quantify or help us understand the magnitude of the effect on revenue of that system switchover? You know, just how much did that cost you?
spk05: Yeah, this is Kevin. Sean. 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 less than 15-ish. It was an issue that happens a lot when you integrate two businesses and have to re-educate all your brand partners and your sales teams. The guys have done a great job of integrating and stabilizing, but it's been hard work, and it was certainly bumpy because we were going very fast across a lot of countries in a lot of geographies.
spk02: Okay. And maybe you can help me understand something. So last year, you know, 2020, you didn't have the Rx until the fourth quarter, and your second and third quarters were about the same. You get to the second quarter of this year, a very big contribution from Rx, and 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?
spk03: There wasn't a lot of seasonality, so it's not really that, but it is a measure and a combination of this integration. I think when you look at the competitive set, 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 it's the first time they were able to do it in 18 months. So I think they took the pedal off the metal a little bit there in that respect. And then we had the challenges, as we mentioned, both with the the 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 systems changeover, 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 business, and that's why Kevin mentioned we see already for Q4 high single-digit growth moving into Q4 as we work through these integration challenges and build the right foundation to help our brand partners grow their business worldwide.
spk02: Great. And just to be clear, that's sequential as compared to the third quarter, that high single digit?
spk03: Correct.
spk02: Okay. And, Kevin, would you expect, you know, given a bunch of the expense commentary, would you expect adjusted EBITDA to be positive in the fourth quarter?
spk05: I'm not going to give guidance, but the answer is certainly if we've made a lot of investments and eliminated some redundancies in positions and rationalized our real estate footprint, So certainly STNA costs will go down.
spk02: Okay, and down in dollars, you mean?
spk05: Correct.
spk06: Okay, all right, thank you. You're welcome. Thanks, Sean.
spk08: A quick reminder for everybody, if you'd like to register for a question, you can do so by dialing 1-4. That's 1 followed by the 4 on your telephone keypad. Next question is coming from the line of Aaron Gray from Alliance Global.
spk06: You may now proceed. Are you guys able to hear me okay?
spk04: Yeah, we got you, dude.
spk03: All right.
spk04: Hi, good evening. Thanks for the question. I'll start right back over. So first question for me, supply chain issues that you spoke to, Brent, obviously an issue that's impacting almost everybody within the industry today. But you kind of spoke to it kind of having continuing impact for you guys. And just curious, you spoke about sometimes the systems consolidation issue. No, just wondering in terms of if the supply chain issues, how much of an impact that might've had. And if you expect that 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, you know, trying to get a better sense of, you know, high single digit growth, you know, for the fourth quarter. Uh, but how do we think about that going into 2022? Thanks.
spk03: It's a, it's a great question, Aaron. And, and I will tell you the supply chain complexities are real. That being said, I can't overemphasize how proud I am of our entire operations and supply chain team and what just a superb job that they've done. And I don't think we've had any kind of negative impact on revenue or disruptions from a supply chain standpoint. We haven't had any out of stock. So that's point one. The second data point in terms of performance on a supply chain and operation standpoint is the improvement in gross margin of six points. That's the end result of shipping and cost of goods sold management and margin improvement in portfolio and improvement in margin from value engineering of the portfolio. So the team has done a superb job on all three of those fronts too. And then lastly, Everybody, I think, on the planet knows of the long-haul logistics and over-water logistics difficulties that are happening around the world. And the things that we've done to alleviate those, we're doing a lot of less shipment, let's say, from Tahiti into the United States, and rather we're doing shipments from Tahiti direct 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.
spk04: Okay, thanks for that, Colin. It's great to hear that supply chain issue wasn't a big impact on the top line during the quarter for you guys.
spk03: This quarter, honestly, it was systems, Aaron, 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 Q4, and it was the Japan sanction recovery, and that is coming back around a bit slower, but still coming around.
spk04: Okay. That's helpful. So then kind of as we look forward, I know you guys aren't giving guidance right now, but I just think about kind of, you know, maybe some sense of normalcy after COVID. You guys had implemented a lot of omni-channel initiatives, you know, maybe COVID, stay-at-home orders, people spending a lot more time then, you know, in the house. But as people get back out, you know, or going back on, you know, taking the vacations, like you talked about some of your own, you know, employees now, how do you think about the business and maybe people spending more of their discretionary dollars, you know, on vacations or otherwise more, you know, out-of-home experiences and how that might impact, you know, the sales trends as we look ahead into 2022. Just trying to get a better sense of maybe those organic growth opportunities, you know, for your omni-channel news that you had. Thanks.
spk03: Yeah. On the negative side first, let me deal with that, right, just to be balanced in terms of the situation assessment. On the negative side, especially in Q3, you saw people getting out, 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, participating or joining in this industry. And so I think every competitor, at least in direct selling, felt that effect. That's short-term, though. Long-term... 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 going to go back. We think traditional retail will continue to be disintermediated. That is really in our sweet spot and a fantastic tailwind for us. We see the real trends towards healthy products and the needs for consumers to to intake more healthy products because they're 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 decisions, it's not TV 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 feeds 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 model, just pulling the scale and the companies together and all of the social selling tech to kind of put that on nuclear overdrive, Aaron, 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 be Monday morning quarterback, I wouldn't change a single thing right now in our business model. I would accelerate it and get it done faster. I would get more scale, because the benefits of scale, as we pointed out to investors, really has the benefit on lower SG&A and higher EBITDA margins. 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, you know, even if I had hindsight, I wouldn't change a single thing of the business model today.
spk04: Thanks for that, Brent. 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 about $100 million for the quarter, you'd peak about $125, $126 million the first quarter. You know, it sounds like it's going to be, you know, some time to get back to that peak level. You know, high single digital puts you around, you know, 108, 109 for 4Q. So is it fair to think that to get to that 125, 126 run rate is going to take some time for you guys? And, you know, it's better to think about that mid-high single-digit sequential growth rate as being the best you kind of measure kind of going forward for the next couple quarters. Thanks.
spk05: Well, I think, again, we're not giving guidance yet, and we're certainly working on the 2022 plan. You know, 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, as Brent mentioned, we've got some new products that we've introduced here in North America that seem to be off to a pretty nice start. So, you know, I think there's plenty of optimism, but we'll put numbers on it when we talk again in March.
spk03: And I would say, just to follow up on that, Kevin's right. We're going to take a cautious, under-promise approach, and we'll come back to you in 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 Germany, in the UK. And then I got to participate in like you know, thousand-person kind of meetings in France and in Italy over the past couple weeks. And we had a huge one in the U.S. and another one coming up this weekend in the U.S. So we are getting back out to the do the business and the excitement of this company. And I don't want to overstate it, but the excitement in the company and the optimism in our company is palpable. So we're just going to build on that and build on that momentum and belief. But, you know, I would say to all of 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 all of our very value-added investors. Thank you.
spk08: All right, and ladies and gentlemen, 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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