New Age Beverages Corporation (NBEV) Q2 2021 Earnings Call Transcript

New Age Beverages Corporation (NBEV)
Q2 2021 Earnings Call
Aug 09, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the NewAge second-quarter 2021 earnings conference call. [Operator instructions] I would now like to turn the conference over to Kevin Manion, chief financial officer.

Please go ahead.

Kevin Manion -- Chief Financial Officer

Good afternoon, and thank you for joining NewAge, Inc.'s 2021 second-quarter investor conference call. I am Kevin Manion. I joined NewAge on July 19 as the chief financial officer. I am very pleased to be with you today and will be joined by Brent Willis, our chief executive officer.

On today's call, Brent is going to provide an overview of the operations and progress against our strategic initiatives, and then I 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 certain forward-looking statements reflecting management's current expectations regarding future results of operations, economic performance, financial condition 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 10-Q filed with the SEC.

Any forward-looking statements that we make on this call are based on 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 10-Q, 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 Willis -- Chief Executive Officer

Thanks, Kevin. We are pleased with our top, middle and bottom-line performance, our third consecutive quarter of positive EBITDA. To remind everyone, that was our commitment, that once we got the scale, we would achieve positive EBITDA. Now, the next commitment will be positive operating income and free cash flow.

And we believe we have the scale and the right structure and infrastructure to deliver that. And we will deliver as we work through the noise of our integration, synergy pass-through and frankly, a number of moving parts and onetime expenses that we do not expect to be recurring. Now, within the quarter, our acquisitions and integrations of ARIIX and Aliven continue to proceed on schedule and financially on track, actually above our expectations and commitment to deliver $20 million in synergies. The leaders of all of the different businesses from ARIIX to Noni to LIMU to Zennoa to our newest partner company, Aliven in Japan, have now integrated in most of the markets, co-located offices, eliminated redundancies and maybe most importantly, combined websites, systems, compensation plans and other activities.

We hope our investor partners understand that this is a massive and very difficult process and set of activities to integrate. But to do it in the first six months of the acquisition is, I would say, laudable and gives us the right foundation, especially systems foundation, to now springboard to the next level. Our refreshed website is now live, along with a consolidated commission system, which is unique to our industry, and it allows for our brand partners to earn commission for their efforts based on a one-of-a-kind multiline payment structure. I'd like to thank our team for the long hours involved to facilitate the integration and also pre-thank them for the subsequent hours that I know are going to be coming for the challenges that always arise post-consolidation.

Now, as the companies combine and we strengthen all of our organizational capabilities, we have added Kevin Manion as our new chief financial officer; and Carin Casso Reinhardt as our chief people officer. These two leaders, in my view, are best-in-class in their respective functions and importantly, have the bandwidth to lead their groups to become the major multinational that we are on track to becoming. Now, Kevin and Carin are embodiments of our shared service team that will span all of the current and future operating companies and business units. I do want to mention as an aside that our current senior leadership team is more than 50% women, military or minorities.

This is reflective of our commitment to diversity, inclusion and opportunities. Overall company female representation is at a 47% rate, and among our brand partners is above 70%, many of whom are fellow shareholders. We are committed to ensuring our company provides opportunities for everyone in every corner office of the company and in every corner of the world. Building on this area, I believe it is a good time to remind you of what NewAge stands for and the operating values and principles that NewAge is committed to.

No. 1, we go big and endeavor to change the world with healthy products, driving wealth and sharing the wealth with all that contribute to our success. No. 2, we never compromise in what we stand for and how we operate with integrity above approach and in what we do with no compromises ever in the quality, efficacy and health of our products, integrating the best of both science and nature.

No. 3, we share ownership. And owners -- fellow owners focus on what matters and deliver no matter what. No.

4, we are accountable. We are metric-driven and disciplined, and we do what we say we are going to do. And finally, No. 5, we live family.

We are building an inclusive culture that embraces diversity and invites others willing to align to our purpose and embodying our culture to be part of this special company we are creating. We believe that in the long run, culture trumps strategy every time. Although we are in the first inning of our company and the first inning of building our high-performance culture, we have the leadership team to build it. And the additions of world-class executives like Kevin and Carin, adding to the others we already had internally, puts us in a very strong position.

Now, that's the how, our values and our culture. Now, to the what with our strategy, healthy, science-backed, functionally differentiated brands, delivered in a direct-to-consumer distribution system that we call D2C, aggregating a global team of brand partner, really influencers, enabled with the leading social selling tech in the industry. Our brand partners are our competitive advantage and so on trend with what is driving consumers' purchase behaviors these days. Over 72% of our revenue is derived from e-commerce AutoShip orders from our website, and more than 85% of our orders are delivered directly to customers around the world, correlating to more than 500,000 drop shipments direct to consumers' homes, every single month in what we call our direct-to-consumer, D2C, business model.

So our model, even at this early stage is really working and beginning to unfold and we are beginning to be recognized for it. NewAge was awarded as the most innovative company of the year by the coveted Golden Bridge Business and Innovation Awards. Other winners included IBM and Wolters Kluwer, so we are in good company there. And one of our new products, Tahitian Noni Superfruit Wellness Shots, was selected as Product of the Year.

We received additional accolades from both The 42nd Telly Awards and the Hermes Creative Awards, two internationally renowned institutions that recognized NewAge for our digital, direct-to-consumer and social media marketing. These wins represent our dedication to providing our brand partners and influencers with world-class content, assets and tools to drive their businesses and relevant media execution for millennials and Gen Z consumers that frankly now comprise more than 50% of the global population. And I'd also add at this fortuitous time with the Summer Olympics taking place, we are proud to announce that 33 of our nutritional products, 33 of them have been included on the globally renowned global Cologne List, which is the world's premier anti-doping testing organization. The Cologne List was initially developed out of a study sponsored by the IOC, the International Olympic Committee, to help protect athletes.

And having an athletes' council comprised of world-class athletes, we have the responsibility to understand the impact that substances can have on them. Every step of our product development process meets or exceeds their rigorous testing standards and our inclusion on the Cologne List in Germany demonstrates the quality, safety, efficacy of our approach and our premier products. And speaking of a trusted resource, we're also excited to report that our children's chewable vitamin, Nutrifii Kids, has been included in the physician's desk reference, also referred to as the prescribing digital reference that now exists solely online. I am so proud of the team with the credibility we are gaining.

And again, we're just getting started with our portfolio. The PDR, this physician's desk reference, is by far the most widely trusted and used directory of ethical pharmaceutical and biological products published for the medical field. No medical reference is more respected or recognized. All of these new products, all of them, marketing and other initiatives are driving top line growth that overall, in the quarter was up 98% versus prior year.

As reported, we were up significantly in Europe and the U.S., both regions contributing attractive double-digit growth. Our focus, however, is to continue to make improvements in the EBITDA margin. To this end, we are working on capturing synergies and importantly ensuring that they translate to the bottom line, further reducing our SG&A that Kevin will review and, at the same time, improving our gross margin. We recently announced the sale of our United States production, actually just an office and filling facility, to TCI, a Taiwan-based public company and world-class manufacturer.

We are aligned with TCI to improve our cost of goods sold by up to 20% in the next few years. And also, through the transaction, we're able to reduce almost $1 million in annual administrative costs. We will also receive $3.5 million in cash and a share of the revenue from TCI over the next five years. So this is just an incredible deal for both NewAge and TCI.

In addition to the financial benefits for both parties, we both get to focus on what we do best. And in the case of NewAge, we intend to continue to focus on what we can be best in the world at. And if we can't be best in the world at it, we will outsource it. We have a lot more actions underway to improve cost of goods sold, and this is just one of them.

In our strategic plan period over the next three years, we expect to approach 75% in gross margin. and we have the road map in place to get there. Look, in the middle of this now endemic, our costs and shipping and supply chain are under pressure as is top line growth. But we are proving resiliency in top, middle and the bottom lines of the business, growing our top line by adding more brand partners, expanding our social selling tools and e-commerce subscribers, strengthening our middle lines both at the cost of goods sold level and SG&A and translating it to the bottom-line results with consistently improving profitability.

And with that, I will pass it over to Kevin to review the details of the quarterly financial performance. Kevin?

Kevin Manion -- Chief Financial Officer

Thank you, Brent, and good afternoon from our global world headquarters in Denver, Colorado. I'll start by discussing our financial results for the second 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, second-quarter revenue was $124 million compared to $68 million, which is a 98% increase over last year. This was primarily driven by the acquisitions of ARIIX and Aliven, which we completed late in the quarter. These acquisitions indicate our continued commitment to our social selling network and our direct-to-consumer route-to-market strategy. Last year's revenue also included $3 million from the retail brands business, which was sold in Q3 last year.

On a regional pro forma basis, our largest market, which is Europe, grew 24%. The United States, which is our second largest market, increased 15%. These pro forma increases were offset by declines in China and Japan. The decrease in Japan was further impacted by the local government-imposed moratorium and recruiting new brand partners, which will be lifted this September.

The current and continuing impact of COVID remains a negative impact on all our markets. Also, on a pro forma basis, FX rates benefited revenue by $3.9 million, mostly in China and the EU. Gross profit increased from $38 million to $84 million primarily due to the organic growth, margin enhancement activities and the additions of ARIIX and Aliven. Overall, gross margin percentage increased from 60.8% to 67.6% due to the positive impact of higher ARIIX margin rates and the disposition of the retail brands business I just mentioned.

Beyond the financial metrics, we are also enhancing all of our internal metrics for all functions and we'll be sharing some of these metrics with you in subsequent quarters. SG&A increased from $26 million to $41 million, primarily, again, due to the addition of ARIIX and other companies that were added to the NewAge 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 46% to 33% this year. This reduction of 13 percentage points is a result of capturing cost synergies on a higher revenue base.

Despite this progress on SG&A, our objective is to be at the industry average of 25% of net revenue. Adjusted EBITDA improved from a loss of $5.5 million in Q2 of 2020 to a positive $1.7 million. We will continue to report and discuss adjusted EBITDA as a key metric used to manage our business going forward. Included as an add-back to adjusted EBITDA is a $4.3 million charge related to the sale of the retail brands business that was sold last year.

This is the impact of trailing liabilities and a note receivable which we have deemed will not be collectible. This is identified as a separate line item on the income statement in the Q. Net income was a positive $17.4 million or $0.11 per share, an increase of $0.21 versus the second quarter of 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 $31 million this quarter.

These instruments were used in our acquisitions and current financing. In essence, 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 $92 million of cash and $31.5 million of debt.

In the early part of this third quarter, $9.7 million of PPP loans were forgiven. As Brent mentioned, our focus is on expanding our EBITDA margin, enhancing free cash flow and driving profitable growth. The projects for reducing cost of sales and SG&A costs are already underway. And coupled with additional actions, which we expect to initiate with our team soon, this will further expand our margins.

We have an attractive balance sheet and cash position, and we believe we have access to more favorable forms of debt going forward that will enable us to reduce interest expense and pursue additional growth opportunities. To close, I'm very happy to be here as part of the NewAge leadership team. I believe we have a strong financial foundation and a fairly strong financial flexibility to pursue our growth agenda. There are many improvement opportunities which are being identified, and I'm confident that the team will be able to capture those.

As far as the future view, there are still too many moving components, including the continuing specter of COVID on our brand partners and our rapid growth from acquisitions. As we gain more visibility and begin to deliver on operating efficiencies and capture the synergies of the acquisitions that we have already discussed, I will be able to provide guidance. I expect this to be in Q1 2022. And with that, I'd like to turn it over to the operator to open up the line for questions from our analysts.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] The first question comes from Aaron Grey with Alliance Global Partners. Please go ahead.

Aaron Grey -- Alliance Global Partners -- Analyst

Hi. Good evening and thank you for the question.

Brent Willis -- Chief Executive Officer

Hey, Aaron.

Aaron Grey -- Alliance Global Partners -- Analyst

So first question from me -- yeah, how's it going? So right, Brent, you talked about prior -- COVID kind of opened up the opportunities for the direct selling model to really sell beyond just maybe face-to-face meetings. You guys opened up more of the interactive video conferencing meetings. So I'll just -- could you provide maybe some input in terms of now where you see things and you're halfway in terms of some of the long-term impacts you believe that might stick in terms of the direct selling model. It seems to be well suited with some of your micro-influence initiatives.

And then, also maybe if you could provide some color of how you plan to leverage that with the new announcement with Verb, I think that would be helpful. Thank you.

Brent Willis -- Chief Executive Officer

Great question, Aaron. I mean I do think that COVID is an accelerant for this model, right? And the move toward direct-to-consumer route-to-market delivery, whether it's from Amazon or it's buy now buttons on a plethora of media sites or the entire direct selling industry, COVID has really been an accelerant. And with the many consumers working from home too, and all looking for new sources of income, especially in developed markets, it has been a good underpinning for, a, a move toward direct-to-consumer delivery and, b, social selling. So we think the underpinnings of our business model are really strong, And it really is this accelerant in the whole social selling realm, which is really our focus.

So we have this group of more than 400,000 brand partners and customers. And we just are building on that like as fast as we can. And that's one of the reasons we're seeing such good growth in Europe and the United States. So COVID does impact us everywhere negatively in terms of ability to operate, but for the most part, we've been able to work through that and offset the negative impact of really not being able to operate in Indonesia, having ups and downs in Japan and other parts of Southeast Asia and Latin America.

But the social selling and frankly, the tech that we've already employed with our frictionless checkout with Smart Link and some of the new tech that we're rolling out, like Verb, like you said, I mean, these are best-in-class apps that enable all of these brand partners and convert them from what used to be pure relationship-based selling to now all social selling, fully leveraging their networks and new networks as people respond to their influence. Whether they be a nano influencer, that's fine with only a couple of hundred followers, to a micro-influencer with thousands of followers to regular influencers and large influencers with more than 10,000. We have them all, and we love them all. And we're just enabling them with the right logistics, the right products, and the right support and the right training as we expand out what we think is really an on-trend business model.

Aaron Grey -- Alliance Global Partners -- Analyst

Thanks for that, Brent. That's really helpful. And then, just a second question from me then.  Alumina flows further along with the integration of ARC. I just want to know, could you kind of speak to where you are today with the company in terms of maybe hunkering down on the existing business or still exploring further M&A opportunities.

You previously mentioned other markets in the past. So what is the kind of get a gauge in terms of where you feel the overall environment is today with kind of the existing business and future opportunities via M&A? Thank you.

Brent Willis -- Chief Executive Officer

Yeah. On the core business, we're focused on four regions, which is Japan, China, Western Europe and the Americas. So we're still focused on those core regions. And we see a lot of organic growth opportunities there.

So we are launching a whole range of new products, leveraging some real competitive advantages that we have within our core platforms. So we see a lot of organic growth opportunities in front of us, and that's one focus. The second focus that I want to ask Kevin to talk to is improving EBITDA margin, but the third focus to your question is on M&A. And M&A has two benefits.

In addition to providing the scale and strengthening our position in those core markets and within our core platforms, by getting more scale and continuing to employ our 3G-like synergy model. That increases our overall revenue, but it decreases the relative SG&A as a percent of net sales, to continue to drive EBITDA margin, which is a key focus of Kevin, a key thing that we believe is going to drive equity price appreciation for our shareholders. And Kevin really brings a whole wealth of experience, not just in M&A and M&A integration, but also in terms of driving holistic financial performance. Kevin?

Kevin Manion -- Chief Financial Officer

So we're excited. We're creating all the metrics and the road maps as we speak. And we can update you in future quarters on all of that.

Aaron Grey -- Alliance Global Partners -- Analyst

All right. Great. Thanks. I'll jump back in the queue.

Kevin Manion -- Chief Financial Officer

Thanks, Aaron.

Brent Willis -- Chief Executive Officer

Thanks, Aaron.

Operator

[Operator instructions] The next question comes from Mike Grondahl with Northland Securities. Please go ahead.

Luke Horton -- Northland Capital Markets -- Analyst

Hey, guys. This is Luke on for Mike. Congrats on the quarter, and thanks for taking the question here. So it looks like Europe and U.S.

were up again and some new products in the pipeline there. Just wondered if there's any particular brands or products you guys see as kind of significant growth drivers going forward, or in any particular geographies that are going to attribute to the top line growth, or just kind of any color on that.

Brent Willis -- Chief Executive Officer

Yeah, Luke. Great question, actually. And I wish I had a simple answer because it's different things in different places. Driving the growth in Europe is really our healthy appearance or inner and outer beauty platform with our new brand, Lucim, that investors may remember got picked up by Italian Vogue and got picked up by The Good Face Project, which rated these products as some of the highest quality and cleanest, least toxic, best for you skin care products out there on the planet, right? So we're really happy with that kind of recognition.

And that's driving a lot of the growth in Europe, especially with younger, I would say predominantly women posting these products as part of their lifestyle and integrating them in their lifestyle. That plus the weight management products. So we have a product called Slenderiiz that kind of code -- goes by skinny drops. And it's all these people taking skinny drops to lose their COVID-19.

So those are the products that are really driving the growth in Europe. In Asia Pacific, in Japan notably, it's been CBD and Noni that's been driving a lot of the growth. And the whole range of the Zennoa products that are really outstanding, the Beauty Rest product, the Core Care product and the Nuku Hiva product that is really a great product that's also -- as a core of Noni. And we actually see a lot of growth in Noni that is almost a $200 million brand for us.

But we think we're just getting started with that brand, and new science is coming out on that, but I can't mention yet. But we expect to leverage that new science behind Noni for its real benefits for consumers and communicating that worldwide. So it's a combination of things over in Asia Pacific and in North America. I would say it's kind of equally split among all of the brands and all of the businesses.

What's great about the ARIIX side of the combination, especially in Americas and especially in Europe, is look, these guys are a growth business. Their leaders are tremendous. And of course, all our leaders are tremendous across the board, but the leaders coming from the ARIIX side, boy, they were really driving tremendous growth. And people are just joining the system and joining this kind of momentum that we have and just getting excited in the ARIIX management.

I think in our industry, it was second to none. And they're really teaching us how to become an organic growth machine. And I really appreciate all of their education, frankly, as we drive this. And those are the organic growth driving initiatives.

I mean you and Aaron sort of asked too about other additions, and there are a plethora of M&A opportunities. And as long as the opportunities are: A, accretive for shareholders from an EPS standpoint; and B, they fit in both strategically and with our other financial metrics, and importantly, they fit with our culture and add to the strength of the overall management team and what we're intending to do, we're taking serious looks at them. But there are a number of those on the plate. And we think we're in both cash, debt and equity where we have to position to be able to execute on the external growth agenda also.

Luke Horton -- Northland Capital Markets -- Analyst

Got it. That's helpful. Thanks for taking the question, guys. And appreciate the comments on the M&A pipeline there too.

Congrats gentlemen.

Brent Willis -- Chief Executive Officer

Thanks, Luke.

Operator

The next question comes from Sean McGowan with ROTH. Please go ahead.

Sean McGowan -- ROTH Capital Partners -- Analyst

Thank you. I have a couple of questions. One, can you give us a little bit more color on that issue of the uncollectible note receivable? Is that -- is there any expectation of getting anything for that in the future?

Kevin Manion -- Chief Financial Officer

Look, we're certainly putting all legal and professional efforts toward collecting it. But right now, it looks doubtful, which is why we put a reserve for it.

Sean McGowan -- ROTH Capital Partners -- Analyst

OK. And is that the full amount?

Kevin Manion -- Chief Financial Officer

Yes.

Sean McGowan -- ROTH Capital Partners -- Analyst

OK. Can you talk --

Brent Willis -- Chief Executive Officer

Sean, it's Brent here. it Won't get worse, but it could get better. But it's not right to manage an expectation that it will get better.

Sean McGowan -- ROTH Capital Partners -- Analyst

Right. I just want to make sure there wasn't another short fall there. Can you talk a little bit about the accounting for the loan forgiveness, the PPE loan forgiveness? How does that flow through, if it does?

Kevin Manion -- Chief Financial Officer

Yeah, it does flow through. I'm going to bring in one of my colleagues here, Carl Aure, who's our Corporate Controller. Carl, could you comment, please?

Carl Aure -- Corporate Controller

Yeah. Sure. I'd be happy to, Kevin. Yes, the way that the PPP loan will be accounted for in Q3 here is we got formal approval that they were forgiven here in July.

And so, as we reported the Q3 earnings that you'll see that debt forgiveness showing up, running through the income statement in Q3.

Sean McGowan -- ROTH Capital Partners -- Analyst

OK. But there shouldn't be any current tax implications for that, or would there be any?

Carl Aure -- Corporate Controller

No, there would not be.

Sean McGowan -- ROTH Capital Partners -- Analyst

OK. And then, another very technical question. I can't remember if I've seen a share calculation chart quite like the one you have now in the 10-Q. Is it possible for us to know in advance what the shares are that are going to show up each quarter ahead of the actual reporting of the results?

Kevin Manion -- Chief Financial Officer

Yeah. Again, that one's going to be difficult because of the variability structure of them. So I don't have an answer that we're able to give you ahead of the quarter. No.

Sean McGowan -- ROTH Capital Partners -- Analyst

OK. Thanks. And then, back to you, Brent, just could you talk a little bit more about that children's vitamin thing? What's your expectation for that going forward?

Brent Willis -- Chief Executive Officer

Well, I will tell you, Sean, like my children, I love all of our brands and all of our products equally. That being said, they don't all have the same potential, but Nutrifii Kids has a tremendous amount of potential. We tested it initially in China. We kind of sold out of it there and expanded it out.

And the way our R&D teams work, I mean, they look, and they survey everything that's out there, retail and across all different aspects of, in this case, children's vitamins to come up with the absolute best. So we think that this is the absolute best on the planet, so much more efficacious than any gummy that we tried out there. That kids might like the taste of gummies and the mouthfeel of gummies, but that doesn't necessarily mean it's delivering the right level of vitamins that kids need. So I give our R&D team such props.

And if we can just really, frankly, from a marketing standpoint, get the word out there of how good this product is and how good this product is relative to everything else out there on the planet, and we've tested it all, boy, consumers will gravitate toward this for their kids because it really is outstanding.

Sean McGowan -- ROTH Capital Partners -- Analyst

OK. Thank you very much. Appreciate it.

Brent Willis -- Chief Executive Officer

Thank you, Sean.

Kevin Manion -- Chief Financial Officer

Thanks, Sean. Operator, I think that concludes our calls for today?

Operator

There are no more questions from the telephone lines.

Kevin Manion -- Chief Financial Officer

Very good. Everybody, thank you so much for joining us today. We appreciate your attendance because we know you have alternative calls to listen to today, and we look forward to talking to you next quarter. Thank you very much.

Operator

[Operator signoff]

Duration: 38 minutes

Call participants:

Kevin Manion -- Chief Financial Officer

Brent Willis -- Chief Executive Officer

Aaron Grey -- Alliance Global Partners -- Analyst

Luke Horton -- Northland Capital Markets -- Analyst

Sean McGowan -- ROTH Capital Partners -- Analyst

Carl Aure -- Corporate Controller

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