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spk01: Good day and welcome to the Vintage Wine Estates third quarter 2023 financial results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing 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 then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Debra Polosky, Investor Relations. Please go ahead.
spk02: Thanks, Dave, and good afternoon, everyone. We certainly appreciate your time today and your interest in Vintage Wine Estates. We have flooded you with quite a bit of information. Following the market close, we filed our restated first quarter 10-Q agreement the press release that details the results for our year-to-date period as well as the third and second quarter. And we've also filed our second quarter and third quarter 10Q. So on the call with me here are John Marimarco, our interim CEO, Terry Wheatley, our president, and Chris Johnston, our CFO. So if you don't have a copy of our earnings release, or the slide deck that will accompany our conversations day, you can find them on our website at ir.vintagewineestates.com. John is going to begin with a brief overview of the quarter, then Terry and Chris will provide more details on the results. We will then open the call to our investors and analysts to ask questions. If you will turn to slide two, you will find 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 risks and uncertainties, as well as other factors that could cause actual results to differ materially from what we state here today. These risks and uncertainties and other factors were provided in our SEC filings that you can find on our website or at sec.gov. 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. We have provided reconciliations of comparable GAAP with non-GAAP measures in the tables that accompany today's slides and release. So let me turn you over to John to begin the discussion. John?
spk06: Thanks, Deb, and good afternoon, everyone. 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. We are focused on rebuilding a more profitable operating structure, realigning the business to focus on our quality assets, and creating a solid structure to deliver future growth and opportunities. Let me start with a quick overview of what I have found since taking on this role and the actions we have taken. First, BWE has an excellent team of people. In addition to being highly experienced and knowledgeable about agriculture, grapes, wine making, bottling, sales and marketing, they are very passionate about what they do. We have a growing finance team that has brought depth to our processes. They are all hands on this restructuring of our financial accounting processes from each book entry through to consolidation and reporting. 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. And finally, we have excellent potential to transform this business into a stronger, more profitable U.S. wine company centered on key brands and operational excellence that create stronger earnings power. There were also a number of things we needed to change. 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, we have to be vigilant with our cash management. The team had already identified the initial actions we took that resulted in net contributions to operating income of about $8 million. This included raising prices on certain brands, increased shipping costs for our TTC business, restructuring freight agreements and simplifying the business, And as part of that effort, we reduced our headcount by about 4% at the beginning of March. We cleaned up our tail products and were able to reduce our SKUs by half from about 4,000 down to about 2,000 thus far. These tail products represented a nominal amount of total volume. I believe we can further cut that in half again. This will be driven by the reduction of parent SKUs from about 900 down to 500. Over the company's 20-year history that included many acquisitions, there had never been any culling of smaller and significant inventories. The strategic action creates greater operating deficiencies, as you might imagine. I will leave the review of our results and financials to Terry and Chris, but will point out that the proceeds from the sale of our Tenma Vineyard went directly to reducing debt. As part of our evaluation of restructuring scenarios, We are also contemplating other potential asset sales to accelerate debt reduction. We are focused on driving operating efficiencies, leveraging key resources, generating cash, and monetizing assets. With that, let me turn it over to Terri.
spk04: Thanks, John. I'll begin my discussion on slide four with the wholesale segment. 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 Ace Cider. Our VWE-managed brands continued to outpace the overall U.S. wine market, including Bardog, Cherry Pie, Cundi, and Photograph. However, third-party-managed brands, such as Layer Cake, underperformed 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 0.4 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 Bardog and Ace Cider authorizations that will begin impacting shipments in the coming months. Wholesale operating loss for the year-to-date period reflects the impact of 127.5 million non-cash goodwill and intangible asset impairment recorded in the second quarter. Turning to slide five, 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 focused on operational excellence to improve profitability. For the year-to-date period, B2B revenue increased 11 million or 13.2% 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. Offsetting this 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 distilled 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, DCC. 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, telesales, 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 details on the financials.
spk03: Chris? Thanks, Terri. Just briefly on slide seven, 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 custom production, and bulk 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 eight, 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 14.5 point impact on margin in the third quarter and a 4.5 point impact for the year-to-date period. Without the adjustment, third quarter gross margin would have been 38%, and the nine-month gross margin would have been 35.5%. I do want to point out with the inventory adjustment, we are revaluing 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 skew reduction that 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 nine, SG&A 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 forfeitures. As we look forward, we anticipate we will incur costs associated with our strategic efforts and leadership changes. Itemized on 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 cost 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 gross profit, and the elevated SG&A on our financial results. Without the non-cash impairment charge, we would have had an operating loss for the first nine months of fiscal 23 of about 18 million. And excluding 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, center our business around profitable channels, markets, and products, and focus on operational excellence. Slide 12 depicts 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 wine industry supports a deep understanding of our business and, importantly, a strong recognition of the value of our underlying assets, including our vineyards and tasting rooms. And that is my second point. While our balance sheet reflects PP&E of about $220 million, if you were to assess market values to our properties and equipment based on appraised values used as collateral to our credit facility, or try and assess the liquidation value, you would have to gross up the PP&E on our balance sheet by about 25 to 30%. Add in inventory and you get real tangible assets on order of about 480 million. 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 of 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 wineries and 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.
spk06: If you turn to slide 13, I'll reemphasize Chris's 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 SKUs 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 business to the Board of Directors in June. While COVID created opportunities for VWE, the repercussions of inflation, labor and supply chain challenges, and higher interest rates created stresses on the business it had not had to address previously. 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 distilled spirits inventory. We are realigning the business and are in the midst of a transition to return to a growing and profitable US wine 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.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're 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 then two. Our first question comes from Vivian Azir with TD Cowan. Please go ahead.
spk03: Hi, good evening. Hi, Vivian.
spk05: So thanks very much for all the color. 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% skew 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.
spk06: Vivian, it's... A lot of it will actually be in the wholesale and the DTC, because when you actually look at our SKU counts, the B2B is not near as big a 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.
spk05: Absolutely, and that seems perfectly reasonable. Just to follow up on that comment, though, and probably less germane 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?
spk06: Well, I think the balance, as I said, we're looking at tertiary SKUs, and if you actually look at the marketplace today and you look at brands, sometimes tertiary SKUs tend divert from the attention on a brand rather than enhance the attention. And so we're looking at this and saying, you know, a specific brand, rather than having 10 SKUs and, you know, working 10 SKUs, may only be looking at 5 SKUs, but we believe we'll actually get much more attention and better shelf positioning with 5 than with 10.
spk04: And Vivian, it really doesn't affect our priorities with our distributors. We still have the same top 5, 6 priorities, which, you know, come down to Bardog and Firestreet and CUNDI and BR 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.
spk05: Awesome. Thanks for that, Terri. And just to follow up on profitability, obviously that was a key theme throughout the prepared remarks, I think appropriately. So as I reflect back on segment level profitability, obviously M&A and other items have created 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 segments, please?
spk03: So as we talked about before, Vivian, that when we get down to operating profitability at the segment, we expect that to level out based on, you know, the cost that it takes to operate each one of those segments. So while the focus is on DTC and wholesale at an operating level, we do expect consistent margins across the three segments.
spk05: 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 a key consideration for wholesale partners. Do you think that you guys are adequately prepared for that? Is that part of the discussion? Are you cognizant that it is going to get more and more expensive for your partners to hold inventory, and are you prepared for that?
spk06: Vivian, 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 inventories from about 60 days on hand to about 45 days on hand, I'm averaging. We think that it's starting to stabilize. And I don't think that we're going to see much more pressure on reduction of inventories, but distributors aren't going to go back to carrying more inventory, 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. We'll continue to watch their inventory, and it will be a constant effort to make sure they don't get too short on inventory.
spk05: Understood. Thank you for all that perspective.
spk01: The next question comes from Luke Hannon with Canaccord Genuity. Please go ahead.
spk00: Yeah, thanks. Good afternoon, everyone. I wanted to ask a couple of questions on the balance sheet here. John, first a clarification question for you. I want to make sure I read this correctly. I think you said towards the end of your prepared remarks you expect to get a $30 million to $50 million benefit. Is that from just the release of working capital in general, or is that specifically the elimination of the bulk spirits inventory?
spk06: No, the $30 million to $50 million was actually a reference to What we would see is a reduction in top-line revenue for the year, and that was related to elimination of some non-profitable business with a major retailer and finishing up the bulk spirits we have on hand. And just to call out, that's kind of what's going to impact top-line in the coming year.
spk00: Okay, understood. So then on the balance sheet here, you talked about potentially doing some additional asset divestitures moving forward here. If I look at the balance sheet, and I appreciate it's not going to capture everything, but if I just look at assets held for sale, it looks like it's less than a million dollars as it stands as of the end of the quarter. I guess my question here is how much more can you really hope to do here in terms of asset divestitures? Where do you see as the, we'll call it highest value assets that you're willing to part with?
spk03: Yeah, so thanks for the question, Luke. It's Chris. So we are still assessing the different assets that we want to look to monetize. We haven't formally finalized those plans yet, and we're continuing to assess, and that will be part of what we present and finalize with the board come June. 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.
spk00: Okay. And in your conversations with counterparties, If I take a look at the deck here, the net debt to capital, total capital is right close to where your covenant is. If I were a potential buyer of these assets, I would think that you'd be coming to the table as potentially a for-seller here, considering that you are close to those covenants. So I guess, how are you guys going to manage that dynamic?
spk03: So we're in active conversations with our lender group. and we're continuing to manage that relationship, and they're supportive. There's more conversations to come. So I'm not at this juncture overly concerned about that impacting our ability to monetize assets.
spk00: 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 the other 60% of that debt? I'm sure I could go into the statements and pick that out. Just curious to know if you have that, Andy.
spk03: Yeah, so in the new debt agreement that we entered into in Q4, we've converted from LIBOR to SOFR, and the term loans are all at a fixed 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.
spk01: Got it. Okay. Thank you. This concludes our question and answer session. I would like to turn the conference back over to John, more a macro, for any closing remarks. Please go ahead.
spk06: Thank you again for joining us today. Well, the last several months have been challenging. We are excited about our future, are working hard to deliver continually improving results. 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.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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