Earnings Transcript for VWE - Q2 Fiscal Year 2022

Operator: Good afternoon, ladies and gentlemen. Thank for attending today’s Vintage Wine Estates’ 2Q 2022 Earnings Call. My name is Tia and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I will now like to pass the conference over to your host, Deborah Pawlowski with Vintage Wine Estates. You may proceed.

Deborah Pawlowski: Thanks, Tia, and hello everyone. We certainly appreciate your time today and your interest in Vintage Wine Estates. Joining me on the call today are Pat Roney, our Founder and CEO; Terry Wheatley, our President; and Kathy DeVillers, our CFO. Pat and Terry are going to provide an overview of our second quarter fiscal year 2022 results and discuss our strategy for growth as well as our outlook for the remainder of fiscal ‘22. After that, we will open the call for questions. As you are aware, we will probably make some forward-looking statements during this formal discussion, as well as during the Q&A session which are outlined here on Slide 2. These statements imply that future events are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from where is stated here today. These risks and uncertainties and other factors are provided in the release as well as with other documents filed with Securities and Exchange Commission. These documents can be found at our website or at sec.gov. During today’s call, we will discuss some non-GAAP financial measures. We believe this will be 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. Reconciliations of non-GAAP to GAAP measures are provided in the press release, as well as in the earning slides that accompany today’s discussion. If you do not have the slides, they can be found on our website at vintagewineestates.com. So, with that, if you will turn to Slide 3, I will turn it over to Terry to begin. Terry?

Terry Wheatley: Great. Thank you, Deb, and welcome everyone. These continue to be very exciting times here at Vintage Wine Estates as we execute on our plan, gaining market share, advancing our multi-brand omni-channel strategy, while investing in infrastructure to scale and further grow the business. Our second quarter results were excellent with a net revenue growth of 33% over last year. This was led in part due to an impressive 51% growth rate in our direct-to-consumer business. This growth was driven by a combination of increased demand for our products through our various DTC channels, including a strong increase in tasting room traffic. The quarter also saw record quarterly EBITDA for Vintage Wine Estates with year-on-year EBITDA growing by over 135% to 20.2 million. On the acquisition front, we continue to execute on our strategy with the acquisition of Vinesse in October, ACE Cider in November, and the acquisition of Meier’s Beverage Group in January of this year. Our three legged stool strategy, as I call it, is driving our success. There is no one element of the business by itself that delivers these kind of results. Our Bar Dog brand is a real crowd pleaser and is setting new records for us. Who knew that an adorable monocled dog on a label could create such excitement. Slide 4 reinforces the strength of our execution. We believe we’re outpacing the industry on all fronts. With strong execution led by what we believe to be very strong brands in the best categories with the most advanced DTC strategy. This has resulted in the exceptional growth in the quarter and year-to-date results while establishing new records of profitability for VWE. To add to this positive momentum, depletions are up 5.5% in the quarter and up 4.3% year-to-date with Bar Dog and Photograph consistently delivering. At Vintage Wine Estates, our focus on the customer experience is integral to what we do. Delivering top quality products and top quality services is essential to developing the brand loyalty and support from our customers that enables us to continue to grow. This relentless focus has seen important customers such as Kevin O’Leary, or better known as Mr. Wonderful, to become strong supporters, brand ambassadors and partners to Vintage Wine Estates, helping to drive increased brand awareness and sales. Turning to Slide 5, you will see we remain fairly evenly balanced among our three business channels. In our direct-to-consumer segment, as I mentioned, we have significant growth of 51%, as we consistently amplify efforts through our many direct-to-consumer channels. These include our tasting rooms, wine clubs, ecommerce, QVC, telemarketing, and digitally native brands. Adding to the future, we now have the addition of Vinesse and ACE Cider, which we expect will help sustain our growth. Of note, our average order value across all key transaction sites was up 8%, volume for direct-to-consumer was up 18.5%, and operating income improved 65%, reflecting an excellent improvement in channel and product mix. Moving on to Wholesale, our revenue was up about 15% and benefited from both the acquisition of ACE Cider and strong depletion volume growth, which was up 5.5% across the segment, and up an impressive 10.6% for our priority brands. Next on our B2B business, demand was strong. This is our private label and custom crush and production services. We shipped a program that had been pushed out from the first quarter, and we had another special in and out program with an existing customer that went quite well. With that, let me turn it over to Pat to talk more about our results, the recent acquisitions, and our outlook. Pat?

Pat Roney: Thank you, Terry, and good afternoon, everyone. To add a little color on Slide 6, as Terry mentioned, we have very strong growth in our DTC segment with net revenue up 51% in the quarter. Acquisitions contributed 5.2 million to the 11.7 million increase. We are counting ACE and Vinesse the acquired revenue and Kunde and the Sommelier Company in ongoing revenue since they’re fully integrated into our operations. Our strong marketing and focus on our luxury brands drove the growth. This focus is also reflected in margin for the segment, which expanded 282 basis points to an operating margin of 32.7%. The 15% increase in Wholesale revenue included approximately 2.7 million in acquired revenue, which primarily was the nearly two months we had ACE Cider. Operating income for the segment was lower as a result of the initial impact of acquisitions before cost synergies. Operating income was also impacted by inflationary cost pressures on our input costs, which as you’re likely aware, is currently an issue in our industry, as well as virtually every other industry out there. Our B2B segment’s net revenue increased by 22% year-on-year, with operating income up 41%. The segment also benefited from shipments that were originally delayed from the first quarter, as we discussed in our last quarterly call. B2B margins improved to 33% reflecting the higher margin mix. In terms of operations, we have actively been addressing supply chain and labor constraints that have previously impacted the segment and remain confident of the outlook for our B2B business. Now if you turn to Slide 7, I’ll touch on our adjusted EBIT and net income for the quarter. Adjusted EBIT was 20.2 million, up 137% year-on-year with EBITDA margin of 24.2%, up 106 basis points from the same period in FY21. What isn’t yet reflected EBITDA is the synergies, we accept capture from our recent acquisitions. It typically takes about six to nine months to integrate the acquisitions, roll up redundant costs and fully capture the opportunities. In fact, in the first six months or so after an acquisition, they likely will then be performing at our level. On net income, going forward, we will be reporting an adjusted net income measure. We believe that adjusted net income presents a more accurate reflection of our normalized performance, adjusting for the non-cash amortization expense from acquisitions, as well as cost items that are temporary or non-recurring in nature, primarily related to the integration the acquisitions, such as inventory step up expense. Adjusted net income was 10.0 million in the quarter was up 170% year-on-year. This was primarily driven by the strong increase in sales and the strong operating margin improvement we saw in the quarter. This was partially offset by higher interest costs in the quarter. Slide 8 demonstrates our financial strength which provides us with flexibility to execute our growth plans. We forecast our CapEx for the year to be approximately $12 million to $14 million following the completion of our warehousing bottling capacity expansion, which was completed in Q1. We are not a CapEx intensive business the way we operate. In fact, going forward, we expect our maintenance CapEx to be relatively modest at about $2 million to $3 million from the business, as it is today, with most of that spent on barrels. We will update this for growth and expansion CapEx, as we identify opportunities. On Slide 9, you will see that we are increasing our guidance to include the Meier’s acquisition, which we completed in January of this year, as well as some price increases. As you know, we do not include any pro forma expectations of prospective acquisitions in our guidance. We expect revenue will be in the range of $275 million to $285 million. At the midpoint of the range, this represents about 27% growth over fiscal ‘21. The second half of the year will be fairly evenly split, although the fourth quarter has the advantage of ACE Cider’s stronger early summer season. In our EBITDA guidance, we have factored in our estimate risk related to supply chain and labor constraints, as well as the offsets we expect from pricing. We expect to continue to navigate the unprecedented supply chain constraints impacting everyone, as we work to identify alternative supply sources and carefully manage shipments to meet customers’ demands. We are implementing strategic price increases starting in March in the brands and channels wherever possible to combat the input cost increases we are seeing. As a result, we expect adjusted EBITDA for the year to be in the $63 million to $66 million range. We expect to begin to realize synergies from our acquisitions and lower our public company costs, as we move through FY23. Looking to Slide 10, we continue to have a robust pipeline of acquisitions, which we are actively reviewing and believe we have sufficient liquidity to secure potential accretive targets. The Meier’s Beverage Group was our third acquisition in the fiscal year and was completed in January. Operating for over 100 years, Meier’s is a leading producer, bottler, importer, and marketer, especially beverage alcohol and non-alcohol products, and is one of the oldest and most versatile custom beverage production facilities in the Midwest. A leading service provider of custom blending contract storage, contract manufacturing, and private labeling for wine, beer and spirits, Meier’s owns a bonded winery, brewery, and distilled spirits plant with processing, blending, and bottling capabilities for a broad variety of beverage alcohol and non-alcoholic products. These operations include three bottling lines and a state-of-the-art beverage canning line that produces over 800,000 cases annually. This is a great addition to our product portfolio and enhances our scale, providing another revenue avenue for us in this highly fragmented market. In particular, this adds capabilities to our ready to drink categories and wine on tap capabilities. Meier’s had about 18 million in annual net revenue and was acquired for 25 million, half of which was funded by cash and half funded by stock valued at $10.16 per share. Finally, to summarize on Slide 11, you can see these are really exciting times at Vintage Wine Estates. Over the last 20 years we’ve executed a plan that delivers excellent growth because of our unique value proposition for our customers. As we advance our strategy, we believe we can accelerate our delivery on high quality services and brands with even stronger talent, greater scale, and strengthened financial flexibility. With that Tia and Deb, we can open the call for questions.

Operator: Absolutely. We will now begin the Q&A session. [Operator Instructions] The first question is from the line of Michael Baker with DA Davidson. You may proceed.

Michael Baker: Hi, couple of questions if I could. One just on the pricing, what -- can you quantify what are you going up by, are you following others or where do you think your price increases will put you relative to competitors? I don’t – I think it’s been a while since there’ve been a price increase but if you have any experience with that, what do you typically see from for volumes when you go up in price, elasticity etc. So just a bunch of little bit more detail on the price increases, please.

Pat Roney: So I would tell you that the market has already started to take price increases, some other companies started as early as December of this year. And generally, it’s widely accepted that the market is going to take significant price increases. And so we don’t see pricing elasticity as being as much as an issue because of the movement in the overall category. And, Michael, you’re correct in the sense that we haven’t taken a lot of price over the last 10 years, the industry in general hasn’t because costs have been fairly stable and it’s a very, very competitive market. But these are rarefied times where we’re going to see, I expect, probably over 80% to 90% of the wineries in the industry taking -- significant wineries taking price increases with most of them in the January through July period.

Michael Baker: And so is there any way - I think the guys went up by 10 million, it seems like a lot of that is the acquisition, which we -- the Meijer acquisition, which we estimated might add 8 million and to beat our sales number at lease by little bit this quarter. Can you sort of break out how much of the guidance increases from the overage of this past quarter or the acquisition or the price increases?

Pat Roney: So the Meier’s is clearly the majority of -- the vast majority of the impact of the increase in guidance because we are following and not leading on the price increases. We expect to have some modest benefit from that this year, which may lead towards more of that to the midpoint or potentially higher in the range. But it’s not a number that we have -- that we’re specifically targeting.

Michael Baker: Okay, fair enough. One more -- if I could one more subject. Just want to ask you about some of your Wholesale business, some of your retail partners, anything to report there. I know you’ve been working on some new programs with some retailers, anything to report in terms of new programs with existing retailers or maybe some programs with new retailers?

Terry Wheatley: Existing retailers, right now we are launching the new Photographs [indiscernible] that will go into Target when they set in March. Also Bar Dog has two new SKU going into Target. We have three new SKUs of Bar Dog going in to Meier’s. We also have Food Lion that’s doing a new SKU of Bar Dog, which we’re really excited about that. Harris Teeter is putting in our Paula Kornell sparkling when they set March, April. And also, H-E-B has a new Bar Dog Pinot Noir going in. These are the chains that have announced that we’ll be setting in March and April, so we’ll get two to three months benefit from that. We still have not heard from another big retailer that’s going to be setting in the summer. We have not gotten word from that and we expect to hear from that shortly. The other great news is on ACE Cider. They’re getting announcements now with 1700 new points of distribution that will be coming March, April, May, so that’s really exciting news for us what ACE.

Michael Baker: Great, appreciate the color and I will turn it over to someone else.

Operator: Thank you, Mr. Baker. The next question is from the line of Vivien Azer with Cowen. You may proceed.

Vivien Azer: Hi, thank you. Good afternoon.

Terry Wheatley: Hi, Vivien.

Vivien Azer: So, I apologize, I hopped on the call a little bit late here. But just curious in terms of the performance in the quarter, any key callouts around relative price point out or underperformance at any key price segment that you guys observed in the portfolio? Thanks.

Terry Wheatley: Yeah, if we’re just looking at the wholesale side we’re really focused in on that 11, 12, 12 to 13 in those price segments. The 13 weeks was off three as an industry, off four on the 12 to 12.99. We actually VWE portfolio grew 17% in that kind of 12 to 13 and 51% in that a little bit higher. So we’re really focused in on that price. We did outperform the overall industry. It was off, total US -- again, we look at that $10 to $20 price point; it was off, I think, 4.8% for the 13 weeks that I’m looking at. The 13 weeks, so you know, that I’m looking at is 11 and we were basically flat during that for the overall. But again, I back it out and I’m really focused in on what Bar Dog is doing, what Photograph is doing, what Firesteed is doing, our top five priority brands, so we’re pleased with that.

Vivien Azer: Absolutely, and plenty of reason to be. Terry, do you here to hypothesize on what you think is happening to the broader price segment. Do you think it’s simply a COVID comp issue or is there more to be read into the health of ongoing consumer? Thanks.

Terry Wheatley: For us, I think that –

Vivien Azer: No, you are getting share for the industry.

Terry Wheatley: Yeah, yes, we’re absolutely getting share. We have just won the half our accounts, our points of distribution were up 15% in wholesale, which was great, really driven by on premise, which is was up 80% for the quarter in on premise, new placements, so really benefiting from that. And then as you see the price moves, we won’t really see those prices move and change from a competitive standpoint, until probably the guides that went up in December and January, we won’t see those until April and May. We go up March, April. We’ll see those really translate into the retail price point about June and July. And what we’re seeing right now is most people are taking about a single price point, so if they were 12.99, they’re going to be 13.99. If they were 14.99, they’re going to be 15.99, so we’ll see how long that lasts.

Vivien Azer: Understood, that’s super helpful. And then just my last one quickly, Pat for you. Given how much more topical rising interest rates are currently, just curious how that’s informing conversations that you’re having with potential targets. Thank you.

Pat Roney: Well, I think in terms of our own internal numbers, that’s we have fair -- we locked a lot of our interest rates, we’re not going to have a significant increase ourselves in the interest costs, but certainly it raises the expectations within our side and the seller side in terms of the hurdle rates for capital acquisitions, and understanding what the future cost of capital is. We certainly we think that that may actually provide even a little more benefit to us.

Vivien Azer: That’s great to hear. Thank you.

Operator: Thank you, Ms. Azer. The next question is from the line of Luke Hannan with Canaccord Genuity. You may proceed.

Luke Hannan: Yeah, thanks. Good afternoon, I just want to get into maybe the trends that you’re seeing thus far in calendar 2022 and, specifically, any customer behavior changes. This quarter so far, relative to last quarter, it was clearly the consumer, it is still healthy, maybe not quite as much as they were to begin 2021 but is there any marked difference that you’re seeing in terms of tasting room traffic or purchase habits, etc, that you’re noticing thus far this quarter? Thanks.

Pat Roney: Well, I would tell you that we’ve seen continued very, very strong demand in our tasting rooms and very incredibly strong demand in the hospitality segment, as people want to get out more. Some pivot their business back to on-premise, but we have certainly seen that the direct consumer channel for us continues to grow and that trend, we think, is going to continue to look good on that segment. And again, while the total wine industry is down a little bit in consumption, and our primary $10 to $15 category is largely flat or a little bit ahead, we continue to outpace that a little bit, so we think the trends look good, not only just for us but the industry in general.

Luke Hannan: That’s great. And then specifically I wanted to expand a little bit on the ready to drink category and ACE Cider as it fits into that. Clearly, 2021 towards the end of the year is a little bit challenging, I think, for the industry as a whole. So for 2022, I guess, what are your expectations? So you can pull out your crystal ball and sort of think specifically as it relates to the ready to drink category and how ACE Cider fits into that, I guess, for depletions or otherwise, how you expect the growth profile of that business to change over the course of next year.

Pat Roney: We continue to be very, very bullish on the ready to drink category and ACE Cider will benefit from the fact that it will now have dual production with the addition of Meier’s and we will move production out there, which will actually make it more competitive on the East Coast and Midwest in terms of pricing. And we are working on some innovation products for ACE that will address many of the consumer trends that we see whether it’s in the CBD legal markets, or whether it’s in the category of better for me, I think we see that very, very strong. And we’re also excited about some innovation projects that we have coming up in the ready to drink. But again, we will never be in the category where we’re going to look to try to dominate the seltzer market and spend $20 million, $30 million, $40 million in advertising behind brands, we’re going to pick our opportunities very carefully.

Terry Wheatley: And Luke, can I add to that. What I mentioned, the 1700 new point of distribution for ACE Cider, I think is great, but that’s also being driven by a new product of SKU that they launched ACE High, which is what they call Imperial is 8%. And that’s where Kroger is putting it in. There’s actually a world market March National Program, which is first ever for a cider, which is great. The integration of their sales team with our sales team and the ability to get into some of these big national headquarters will really benefit our ready to drink cider. And so again, if you look down, I have a whole list of new authorizations that will be coming online March, April, May that will benefit ACE Cider. So innovation will come through there as well. We’re looking at some things that we could add to that portfolio, so super excited about ACE Cider.

Luke Hannan: That’s great. That’s all I have. Thank you very much.

Operator: Thank you, Mr. Hannan. The next question is from the line of Daniel Biolsi with Hedgeye. You may proceed.

Daniel Biolsi: Thank you. Thanks for taking my questions. Did selling lag depletions by 5% and what was behind that and should we expect a channel fill, going forward?

Pat Roney: Terry?

Terry Wheatley: No, I’m not quite clear on the question again, was what?

Daniel Biolsi: Well, the predictions were 5.5% but it looks like the organic wholesale was about flat. So did the selling just lag the depletions and are you expecting the customers to be filling that back in the future or are they going to work with the lower level inventory?

Terry Wheatley: Well, no, I actually am looking at some Wholesale inventories. And I think we were having some really positive shipments in January and now into February, so I think that will sell.

Daniel Biolsi: Okay. And as far as the supply chain is going, is that impacting your ability to make shipments or where is that really challenging you besides the costs?

Pat Roney: The supply chains is challenging in terms of the lead time, so lead times are getting extended. Class companies are working on to three months lead time, are now working on 16 to 18 months lead time. Transportation cost in terms of getting capsules, corks, and things like that, from Europe are taking longer to get and just supplies in general are harder to source but we’re working through it. I mean, we’re large enough company where you have enough resources and we get the demand of our major suppliers, but it’s just -- sometimes it causes some of the bottling lines to be down because we can’t deliver on time. But we anticipate, after the first quarter that we will be able to catch up with all the programs just like we did in the second quarter. And we think the third and fourth quarter will help us. There were -- certainly many people thought that this supply chain shortage might last until the end of the year, but it’s probably going to last for another 12 months, through all of 2022. But we’ll just continue to watch it, monitor it and deal with the challenges that are provided.

Terry Wheatley: And I would add another supply chain -- Oh, I’m sorry.

Daniel Biolsi: Sure. Sure, go ahead.

Terry Wheatley: I was just going to add another supply chain issue is our distributors getting enough trucks to come in and pick up product there. Several mornings we will come in and there’ll be 10 trucks lined up that are just waiting to get in to the warehouses to take product out. So trucking has been an issue for our distributors.

Daniel Biolsi: Okay. Thank you for that. I had one more, if I could. This is sort of a high level question. Have you seen any difference in like -- in your DTC growth versus your retail growth in any of the country that had more restrictions on premise like, for example, in California and New York, as your DTC business been different than Florida and Texas, which is on premise open for longer? Just looking out going forward, if those states remove all those restrictions, what should we expect, if anything? Thank you.

Terry Wheatley: I’m not really sure that there has been a regional effect on our DTC business. It’s very strong across the board in all markets. So I don’t really see that will have a big effect.

Daniel Biolsi: Okay. Thank you.

Operator: Thank you. The next question is from the line of Joe Feldman with Telsey Advisory. You may proceed.

Joe Feldman: Yeah. Hey, good evening, guys. Thanks for taking the questions. So wanted to go back, with regard to the EBITDA guidance that you guys gave, it went up just a tiny bit at the high end. And I guess I’m wondering, how much was Meier’s or should Meier’s be contributing to the EBITDA guidance? Because I guess I was under the impression with the 18 million of incremental revenue that that you’d be adding on an annualized basis that it actually had a pretty decent EBITDA margin. So can you maybe help explain that?

Pat Roney: Well, it’s two things. A lot of Meier’s business is focused on the second half of the year, and two, we have a lot of acquisition integration costs that are associated with that. And then the continued -- when you talk about EBITDA in general, we continue to see issues with labor and issues with the supply chain, which are going to offset some of that increased margin, EBITDA margin from Meier’s. So it’s really, it’s a blend of all those things, that we continue to be fairly comfortable with our overall year guidance and, hopefully, we may even have stronger than what our current guidance is.

Joe Feldman: Got it. Now, that makes sense. And then, with regard to the supply chain constraints that you are facing, and the labor pressure that you’re facing, I guess, other than the price increases, you mentioned a couple of times that you’re addressing these issues, and I was just curious, if you could give us – remind us how you are addressing them and some things that you are doing to offset the pressures beyond just the price increases?

Pat Roney: Well, we’re bringing on an additional 3 million cases of glass from G3 from the Gallo bottling facility and we’re qualifying a couple of its suppliers, we’re expanding our supplier reach with that to make sure that we’ve got our supplies. We’re increasing pay rates to people to attract more labor and some other additional incentives for people on that side. So we’re addressing pretty much on a daily basis, all the supply constraint issues that are out there in the market, as well as continued issues from COVID and continued tough labor market in general.

Joe Feldman: Yeah, that makes a lot of sense. And then, I guess the one last one for me just -- as you’re looking at your acquisition pipeline, Pat, are you focused I guess we’re you’re focused now because you I like you know, you guys bought Meier’s, you brought into new distribution, you’ve done that Somali [phonetic] company recently. You’ve done a few things, I guess, outside of wine. So I’m just wondering, do we go back to wine for the next couple or is it that you’re seeing more opportunity or better opportunity outside of some of the wine businesses that are out there?

Pat Roney: No, wine is clearly going to be our primary focus and I wouldn’t be surprised if the next one or two acquisitions are wineries, from that standpoint. It just -- we will look at all the opportunities, as they present themselves, and in the wine category, there are certainly some opportunities that are going to present themselves and they just have to be the right ones at the right time. And then some of these other bolt on ones that were strategic in nature made a lot of sense to do at the same time. And we knew when we acquired ACE hard cider that we are going to acquire Meier’s, to expand the production capacity to the East Coast, it made a very strong strategic sense that there’s somebody that we’ve done business with for 10 years. And we knew we were going to add some great young management talent to the team. But I would say that I, probably, on my desk to take day, I think I have two or three non-winery acquisition opportunities and I think somewhere around 20 winery acquisition ones. So the numbers will probably tilt back in favor of winery acquisitions here shortly.

Joe Feldman: Got it. Thank you. Thanks and good luck with the quarter. Thank you.

Pat Roney: Thank you.

Operator: Thank you. There are no additional questions at this time. I will now pass it back to Pat Roney for any closing remarks. You may proceed.

Pat Roney: Well, thanks everyone for joining our call today. We certainly look forward to getting together with you again in another 90 days and continuing to provide you with our, what we believe will be consistent growth in the coming quarters and continued acquisition opportunities and strong organic growth. Thank you very much for your time today.

Operator: That concludes today’s Vintage Wine Estates’ 2Q ‘22 earnings call. Thank you and have a great day.