Earnings Transcript for VWE - Q3 Fiscal Year 2022

Operator: Good afternoon. And thank you for attending today's Vintage Wine Estates Third Quarter Fiscal Year 2022 Results Conference Call. My name is Daniel 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 would now like to pass the conference over to our host, Deborah Pawlowski and the Investor Relations of Wine Estates. Please proceed.

Deborah Pawlowski: Thanks, Danielle. And hello, everyone. We certainly appreciate your time today and your interest in Vintage Wine Estates. Joining me on the call are Pat Roney, our Founder and CEO, and Terry Wheatley, our President. Also joining us today. We are welcoming Kris Johnston, our new CFO. Pat and Terry are going to provide an overview of our third quarter of fiscal year 2022 financial results and discuss our strategy for growth as well as our outlook for the remainder of the year. After that, we will open the call for questions. As you are aware, we will -- we may make some forward-looking statements during this formal discussion, as well as during the Q&A session, which are outlined on slide 2. These statements apply, future events are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what 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, which are the press release as well as the slides that are accompanying today's conversation, can be found on our website. During today's call, we will also discuss some non-GAAP financial measures, which we believe 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. So, if you will now turn to Slide 3 on the quarter deck, I will turn it over to Terry to begin. Terry.

Terry Wheatley: Great. Thank you, Deb, and welcome everyone. Our third quarter results were excellent with a net revenue growth of 68% over last year. This strong growth was driven by impressive increases in volume across all segments. Organic growth was 44% while acquisitions contributed $11.4 million in net revenue in the quarter. While our Omni-channel market strategy is a key differentiator for us, our direct-to-consumer business is clearly our jam. Our brands continued to outperform with broad market appeal. Those that garnered headline status include, of course, our Bar Dog brand that has taken the market by storm, but also Firesteed has a very strong appeal across a broad demographic. Our customer is very pleased with how well the Photograph brand is performing for them. And our Clos Pegase brand is a strong, well-recognized name in many homes. Operating income expanded nearly five times to $900,000 and adjusted EBITDA increased 38% to a record level $14 million. As a percentage of net revenue, adjusted EBITDA was $17.7 compared with $21.6 in the prior-year period due to the combination of acquisitions not being fully integrated and higher-costs not yet covered by pricing actions. Pat will talk more about expected synergies and timing. On the acquisition front, we continue to execute on our strategy with the acquisition of Meier’s Beverage Group in January of this year. On slide 4, you will see our Omni-channel marketing strategy provides a competitive advantage as we remain fairly evenly balanced among our three business channels. With the delivery of private label program, our B2B channel had a very strong quarter benefiting from the addition of Meier's. For our wholesale business off-premise sales were up against tough comparisons with last year's quarter, which was still impacted by COVID restrictions that kept folks more or less at home and ordering online. Nevertheless, depletion volume growth was 2.4% and was 7.6% for our top tier brands. Our DPC channel is a hallmark of Vintage Wine Estates and continues to validate the success of our Omni-channel strategy by reaching the consumer through multiple touch points. One of our latest examples of expanding our reach to the consumer is our partnership with travel and leisure wine. I should mention as well, our new product line initiative next strength, which is focused on the development, marketing, and sales of alternative beverage products. We believe alternative beverages share many synergies with wine. And this adjacency presents an opportunity for further growth through diversification. We plan to leverage our operational expertise across new categories to build greater value as an enterprise, although our core will always be Wine. Next Drinks creates a product line category exclusively devoted to the developing brands in the alternative beverage space that encompasses alternative packaging, flavors and infusions, non-alcohol, low alcohol, and CBD infused beverages. Tracy Mason has joined us to lead this new operation. Tracy brings a breadth of sales and marketing experience in the beverage alcohol industry. We will anchor the Next Drinks portfolio with our ACE Cider business and plan to launch new alcohol-removed hemp CBD infused ACE Cider products in the latter half of this year, leveraging ACE's product development and production capabilities, as well as it's channels to market. We also acquired intellectual property rights to the women focused, low calorie, botanical, and cannabinoid infused sparkling beverage brand, Gem + Jane, which we plan to reformulate into a hemp CBD and adaptogen infused product to allow for national retail distribution. 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. Turning to Slide 5, you will see additional segment discussion. As Terry mentioned, we had a very strong growth in our DTC segment, with revenue up 34% in the quarter to $19.6 million. That was a result of strong organic growth of 11.3%, and $3.3 million of acquired revenue. Tasting room traffic growth of 45% primarily drove our organic expansion. Recovery from COVID restrictions continues to drive on-site customer engagements, which also had a positive impact during club membership gains. Of note, our combined average order value was stable across all DTC channels. Volume for direct-to-consumer was up 67%, reflecting increased tasting room traffic. On-site purchases and Wine club membership gains. Moving on to Wholesale, our revenue was up about 16% to $24.6 million. Acquired revenue was $5 million, which helped against the challenging comparison quarter for the off-premise market, across brands depletion volume grew 2.4%. Priority brands, which amounted to 55% of total depletion volume saw depletion growth of 7.6%. Next, our B2B business, demand was quite strong with revenue increasing 205% to 33.7 million. The acquisition of Meier's at the beginning of the quarter contributed $3.1 million and our results were also driven by our ability to deliver for our customers private label programs. Our multi-brand portfolio should help continue to drive strong results. With the strong B2B segment growth of 205% year-on-year, operating income was also measurably. The segment benefited from a 33% increase in volume as a result of being able to get customer programs delivered following delays from supply chain issues in the first quarter. B2B margins improved to 31%, reflecting a higher margin mix. If you turn to Slide six, I'll touch on our adjusted EBITDA and net income for the first quarter. Adjusted EBITDA was 14 million up 38% year-on-year. With EBITDA margin of 17.7% down 390 basis points from the same period a year ago. Adjusted EBITDA was impacted by acquisition integration costs, higher dry goods costs, and public company costs, which were not incurred in the last year's third quarter, yet to be offset by recent pricing actions. As you were all well aware, the challenges and supply chain and labor constraints, as well as inflation have not at all abated. We're continuously juggling production plans to meet delivery schedules. I believe we have been quite executing well, given the environment. As to synergies, it can take up to 24 months to fully integrate acquisitions, roll off redundant costs, and capture all of the available opportunities. Combined, the Vinesse, ACE, and Meier's acquisitions are expected to contribute on order of an additional $2 to $3 million in cost synergies beginning over the next 6 to 18 months. Net income available to VWE common shareholders for the third quarter was $2.8 million, up from a loss of $900,000 in the prior-year period. On a per diluted share basis, net income available to VWE common shareholders was $0.05 for the quarter compared with loss of $0.04 per diluted share in the prior-year period. We believe adjusted net income presents a more accurate reflection of our normalized performance. On that basis, adjusted non-GAAP cash net income, which excludes amortization of intangible assets related to acquisitions, was $4.9 million or $0.08 per diluted share. Slide 7 demonstrates our financial strength, which provides us the flexibility to execute our growth plans. CapEx in the third quarter was $4.4 million, bringing the year-to-date level at $15.7 million. We are increasing our CapEx forecast for the year to be approximately $19 million to $20 million up from $12 to $14 million. While our operating and maintenance CapEx is a relatively modest $2 to $3 million, we're opportunistic regarding investments to improve productivity and enhance our efficiencies. With the acquisitions we have identified projects that we expect will provide strong returns and our expanding certain lines as well to meet growing demand. As I noted before, we will update this for growth and expansion CapEx, as we identify opportunities. At the quarter end, the company had approximately 247.9 million in liquidity available for organic investments in acquisitions. This included $70.9 million at unrestricted cash, approximately $77 million available under our revolving line of credit, and a $100 million available under the accordion feature, the lending agreement for acquisitions. On Slide 8, you will see that we are increasing our guidance to reflect our out-performance in the quarter. 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 $290 million to $295 million. At the midpoint of the range, this represents about 32% growth over fiscal year '21. In our EBITDA guidance, we have factored in our estimated risks related to supply chain and labor constraints, as well as the offsets we expect from pricing. As we continue to deal with these challenges, we now expect adjusted EBITDA for the year to be in the $62 million to $64 million range. We expect to begin to realize synergies from our acquisitions and lower our public company costs as we move through to fiscal year '23. Looking to Slide 9, we believe we offer compelling investment thesis as we deliver higher growth and top tier EBITDA margins. The industry offers strong tailwinds supported by demographics and consumer behavior. We will remain focused on our growth strategy, which includes acquisitions, to deliver solid performance to our shareholders. As Terry mentioned, we have been outperforming and I believe it's a direct reflection on the depth and breadth of our leadership team. Finally, to summarize on Slide 10, we are very excited about our future even in these tumultuous times. We continue to innovate while also drive in operational efficiencies and expect to continue to outpace the industry in growth. With that, Danielle, we can open the line to call for questions.

Operator: Certainly. [Operator Instructions] We will pause here briefly as questions are registered. The first question comes from Vivien Azer of Cowen. Please proceed.

Stanley Harrison Vivas: Great. Thanks so much for taking the questions. This is Harrison Vivas on for Vivien. First one I wanted to ask is so we've seen some headlines around late-season frost in both Oregon, the Willamette Valley, as well as parts of California; so just any comment around your expectations for the harvest this year?

Pat Roney: Well, we can speak to Oregon first. There was for sure issues up there and the crop is probably going to be at 50% to 60% levels of normal years. It's been a little bit like the last couple of years. So that's not necessarily a surprise. And in California, there has been spotty frost in certain areas, but nothing significant at this point. We're still too early to tell where California is going to come out.

Stanley Harrison Vivas: Understood. Turning to your guidance, it looks like the implied EBITDA margin that you're looking for is about 150 bits lighter than previous at 21.5%. You had talked about, Pat, pricing -- offsetting a lot of those cost increases. What changed most over the course of the quarter that caused you to reduce your EBITDA margin expectations?

Pat Roney: Well, we have just seen significant and continued price increases from a lot of our suppliers. And expectation is that we're still providing a range of revenue as well as EBITDA. So, we may perform a little bit better in terms of the EBITDA, but we're comfortable with the numbers that we provided today.

Stanley Harrison Vivas: Okay. That's helpful with another back-of-the-queue.

Operator: Thank you. The next question comes from Luke Hannan of Canaccord Genuity. Please proceed.

Luke Hannan: Thanks. Good afternoon, everyone. I wanted to start with the price increases. Pat, I think you mentioned that Q4 is when we're going to see more material price increases that will flow through and show up in your results. Can you give us an idea? I know that you guys are primarily a price follower, but I want to get a sense of the magnitude of that price increase and whether there's enough headroom for you guys to be able to continue increasing those prices while maintaining that value proposition with the customer.

Pat Roney: It's a good question, Luke. I think on an annualized basis, our first ground of price increases we've seen. It will translate to it up an overall 3% annualized increase and pricing and the revenue. And as we look forward and now with the expectations there may be continued increases from our car suppliers on dry goods. We haven't rolled out, taking prices up again late sometime next fiscal year.

Luke Hannan: Okay. Understood. And then switching gears to your acquisition pipeline. I know a part of the -- one of the reasons why you guys stepped into the public markets was because you'd be able to take advantage of that private to public arbitrage that you'd be able to leverage by executing on that acquisition pipeline using a public vehicle. I'm curious to know if there is any slow down or potential inhibitors for you guys being able to consummate on what's in your pipeline with your stock trading out a lower multiple?

Pat Roney: No. We have enough cash to go ahead and do all the acquisitions that we're currently contemplating and we actually have certainly a very solid pipeline of opportunities ahead of us. And we're very optimistic about that and bullish about it. And we'll hopefully be in a position to announce acquisitions in the very near term.

Luke Hannan: Okay. Last one for me. And then I'll pass the line here. It's probably too early, maybe, to be asking this question but I'm just curious on what your initial expectations are for fiscal '23, just in terms of guidance. Should we be expecting anything that's materially different than the growth rates that you guys have been able to put up in the past?

Pat Roney: Yeah, and Luke, I think you're right. It's probably a little early to talk about guidance for next year as we in the middle of our budget and planning process and finalizing some of our acquisitions, but we continue to stand behind our growth history and continue to stand behind the plan to make additional acquisitions as well as organic growth. So, I think it's -- the future looks bright.

Luke Hannan: Understood. Appreciate callers. Next, thank you.

Operator: Thank you. Next question comes from Daniel Biolsi of Hedgeye. Please proceed.

Daniel Biolsi: Hi Pat. I was wondering if you could elaborate on the very robust store brand growth you had maybe if you can break out how much of those are new doors or accounts or shelf wins. And if that's a seasonal win or a year-round program?

Pat Roney: Some of it is timing-related, some was timing for things that were delayed from last year and some of it's related to the acquisitions that we did. And then some related to new store growth for sure in new brands, new doors. In particular, the Bar Dog continues to accelerate its points, the distribution accelerates its philosophy, so, that's a good mark for us. And then on the direct-to-consumer side we're having hospitality bookings up. Having more people come back to the properties and that's accelerated a lot of growth and we're getting some new consumers out of that. For all those are good solid wins.

Daniel Biolsi: And can you elaborate a little more on how you are going to manage the distributors and you other customers from buying ahead of price increases?

Pat Roney: We don't -- the consumer side of it is relatively -- we announce some of their -- they go forward the next day, so there isn't really any buy-in opportunity in the consumers and the wholesaler's used to buy-in ahead of time, but the way that they manage their cash, they really aren't doing much of that with the exception of making sure they have enough inventory on the floor to cover their pricing commitments to their major retailers. They already have an average of 90 days inventory on the floor before we announce the price increases. So, we haven't really seen, nor do we expect to see a lot of buy-in.

Daniel Biolsi: Thanks for that.

Operator: [Operator Instructions] Next question is from Joe Feldman of Telsey Advisory. Please proceed.

Joseph Feldman: Hey, good afternoon, guys. It's Joe Feldman from Telsey. You mentioned the CapEx. You took up the budget a bit. Can you talk about some of the new projects that are driving that higher? And what you're hoping to achieve from those new projects.

Pat Roney: Yeah. It's not only projects some of it is delays, things that spilled under this year versus last year, but there are some, for instance, we're putting a new Canian line and the Meier's facility will allow us to bring canning for ACE hard cider into the East Coast will -- which will then really provide some tremendous opportunities to have savings of freight savings which will translate into higher prices for us. And that's a significant capital investment. We've got on the books the new sparkling line for our Leticia facility, which will improve overall operating efficiencies and allow us to get more volume out of that facility as we continue to grow brands like the Paula Kornell sparkling and the Leticia sparkling and some of the efforts, we have behind there. Those are -- those are some of the major and significantly multi-million-dollar kinds of projects.

Joseph Feldman: Got it. Thanks. That's helpful. And then with regard to the increased cost pressure, I guess, relative to what you expected at the start of the quarter, was it more of the supply chain side and inflation? Was it more of the lack of the acquisition synergies like the -- or not lag, but the delay of those? Like, can you break down how much was each of those two big buckets and where you also felt it was a little different than what you thought it a quarter ago?

Pat Roney: Well, the supply to this -- supply chain is the primary driver, it is more price increases with shorter notice from our supplier. I mean, those are things that just happened, there is impact, some of the largest suppliers of Wine -- wine capsules. Most people probably don't know it's actually the Ukraine in the world. So, we've seen shortages on that side and we've seen continued stock outs and price increases from our glass vendors with that. And the acquisitions are going as expected. But when we provide results without the acquisitions, it was always on a pro - forma basis and now it's actually with the actual mutations and it just takes a little while, but we continue. We're optimistic about all of our acquisitions. We've just started with [Indiscernible], now it's fully producing the wines and those roll through our cost of goods. So, we will see the benefit of those in coming months and we've transitioned to our own pick and pack facilities just last month and so we'll also begin to see the benefits of some of that. So, the acquisitions are doing well and we also made -- we've also made some minor CapEx to increase tank capacity at Meier's so we can get it ready for the 0.5 million plus cases of hard cider that we're going to move to that facility plus some other projects.

Joseph Feldman: Now that's helpful. Thanks, guys, and good luck with this current quarter.

Pat Roney: Thank you.

Operator: Thank you. There are currently no further questions in the queue, so I will pass it back over to the management team for closing remarks.

Pat Roney: I'd like to thank everybody for taking the time to get on the call today and we continue to remain very optimistic and excited at Vintage Wine Estates as we continue to drive revenue and continue to improve overall profitability, and we look forward to providing positive results next quarter. Thank you.

Operator: That concludes the Vintage Wine Estates third quarter fiscal year 2022 results conference call. Thank you for your participation. You may now disconnect your line.