Vintage Wine Estates, Inc. (NASDAQ:VWE) Q1 2023 Results Conference Call November 9, 2022 4:30 PM ET
Company Participants
Deborah Pawlowski – IR
Pat Roney – Founder and CEO
Terry Wheatley – President
Kris Johnston – CFO
Conference Call Participants
Vivien Azer – Cowen
Mike Baker – D.A. Davidson
Luke Hannan – Canaccord Genuity
Sarang Vora – Telsey Group
Operator
Thank you for standing by. This is the conference operator. Welcome to the Vintage Wine Estates First Quarter Fiscal Year 2023 Financial Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions]
I would now like to turn the conference over to Deborah Pawlowski, Investor Relations. Please go ahead.
Deborah Pawlowski
Thanks, Sachi, and good afternoon, 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; Terry Wheatley, our President; and Kris Johnston, our CFO. You should have a copy of our earnings release that crossed the wires after the market, as well as the slide deck that will accompany our conversation today. If you do not have these documents, they can be found on our website at ir.vintagewineestates.com.
Pat is going to begin with a brief overview of the quarter. Then Terry and Kris will provide more details on the results. Kris will also review our guidance for fiscal 2023. Afterwards, we will open the call to our analysts to ask questions.
If you turn to Slide 2, 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 where we are today. These risks and uncertainties and other factors were provided in our 10-Q filed with the Securities and Exchange Commission as well as noted in the press release.
You can find these documents 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 release. Pat and Terry’s discussion are covered on Slide 3 to 5. So with that, let me now turn it over to Pat to begin. Pat?
Pat Roney
Thanks, Deb, and welcome, everyone. We’re off to a solid start for the year as we continued to execute against our key strategic growth objectives. Highlights for the first quarter include double-digit revenue growth across our business segments, including 13% organic net revenue growth. I’m especially pleased with the results on our direct-to-consumer business, where Terry will provide additional details in a few minutes. We are uniquely positioned in the premium and luxury wine categories that are proving resilient in this rapidly changing macroeconomic environment. Interestingly, back in the great recession, these wine categories and our business in particular, demonstrated great resiliency.
We’re able through that time to grow both our revenue and net income. We expect, as we navigate these current times, our categories, brands and value propositions will help to differentiate us from the competition. Beyond our excellent organic growth results, we also saw strong contributions from our acquisitions. We are making progress with the integration of the acquisitions into our operations in order to capture synergies. In fact, in this quarter, ACE Cider achieved record shipments as a result of the new canning line installed at the ACE Cider facility in Sebastopol. This enhanced capacity enabled accelerated growth for the business. We made progress in a number of areas to improve operational efficiencies, despite the headwinds of ongoing cost pressures, driven by increased shipping costs related to elevated gas prices. While we continue to experience ongoing supply chain constraints with closures and the timing of class supply, the agility of our team has helped to keep production flexing to deliver to our customers. We are working to improve operations further, including more communications with trucking companies to get them to pick up products, as they struggle with their schedules.
As you know, we’ve selectively taken price to offset some of these headwinds, and we will continue to evaluate additional pricing opportunities as we progress through the year.
We’ve recently enhanced the talent within the organization in key areas. Zach Long, who has been our Senior Vice President of Winemaking & Production, was recently promoted to the Chief Operations Officer position. Zach continues to prove that his insights, leadership and organizational skills highly complement his depth of knowledge in winemaking. He now has full operational oversight over supply chain and all production activities.
In addition, we expanded the responsibilities of Jessica Kogan, who named our Chief Growth and Experience Officer, where she will be focused on unique ways to deepen consumer affinity to drive additional gains for our businesses across the beverage alcohol category. Jessica recently joined Vintage Wine Estates in 2017 with our acquisition of Cameron Wines, a digitally native business that she cofounded.
I’m proud to report that we’ve advanced our ESG strategy with the receipt of a sustainable certification designation for all of our California state wineries and vineyards.
These certifications are a reflection of our ongoing commitment to environmental stewardship, and support our sustainability strategy. Speaking of the vineyards, we successfully completed this year’s harvest. While California’s volume was light, quality is very good, as is the quality in Oregon and Washington.
With that, let me turn it over to Terry to talk more about our segment results. Terry?
Terry Wheatley
Perfect. Yes. Thank you, Pat. As Pat mentioned, we are especially pleased with the double-digit organic growth achieved in our direct-to-consumer and B2B businesses. Our direct-to-consumer business continues to demonstrate the strength of our industry-leading digital marketing strategy and customer focus as an enabler of growth.
Digital innovation is a pillar of our overall growth strategy, and we will continue to leverage the power of digital technology focused on unifying the omnichannel experience for our consumers.
In fact, I believe that our innovative strategy in this area is one of our strongest differentiators versus our competitors, and is driving our DTC segment, which today, represents almost 1/3 of our total business.
Within this segment, we saw a particularly strong growth during the quarter, from our QVC and White Club channels. And despite the current inflationary cost environment and its impact on consumers, we are seeing steady hospitality and tourism trends for our business, with strong foot traffic growth in our tasting rooms of almost 10%. We saw equally impressive growth from our B2B business, primarily driven by increased custom production activities, a key customer and contributions from our Meier’s acquisition.
From a wholesale segment perspective, our portfolio is outperforming the U.S. wine category as we continue to focus on developing, launching and promoting our newly acquired ACE Cider line of products, along with our key priorities and core brands in the marketplace.
During the quarter, we saw a particularly strong marketplace performance for key priority brands, including Bar Dog, Cherry Pie and Photograph. As Pat mentioned, our recently acquired ACE Cider brand delivered record volume performance driven by ongoing category growth for this segment of the beverage alcohol market and production efficiencies achieved since acquisition. In addition, we made progress in obtaining new retail authorizations for shelf placement on key brands, the benefits of which you will see later this year. Although we had a slow start to the year from a wholesale depletion perspective, driven by Layer Cake, we are progressing with our rebranding and marketing refresh initiatives for this brand. You should look forward to the results of these efforts later this year.
With that, let me turn it over to Kris to talk more about first quarter results. Kris?
Kris Johnston
Thank you, Terry, and good afternoon, everyone. I apologize, I feel fine, but I’ve lost my voice. So I appreciate your patience as I may have to pause to suit my throw as we go through. Turning to Slide 6. You’ll see additional segment discussion.
Revenue grew 40% or $22 million in the quarter, which included $14.9 million of acquired revenue. As Terry mentioned, we had very strong growth in our direct-to-consumer segment, with revenue up 37% in the quarter to $20.5 million. This was the result of strong organic growth of 13% and $3.1 million of acquired revenue. You will find in the supplemental slides that we have a table that provides our acquired revenues by quarter.
Next, on to our B2B business, where 39% revenue growth was driven by increased private label and custom production activities, while the Meier’s acquisition contributed $4.9 million in the quarter. Within our wholesale business, revenue increased 44% to $23.4 million, including $6.9 million of acquired revenues from ACE Cider, which is a high-volume business that is performing extremely well in the marketplace.
If you’ll turn to Slide 7, you’ll see that Q1 gross profit increase resulting from strong revenue growth across all business segments, while Q1 gross margin was 38.7% versus 42.1% in the prior year due to increased overhead absorption.
Looking to slide 8. Our SG&A results reflect $4 million in acquisition-related SG&A, plus $4.6 million from the issuance of stock-based compensation that was not included in last year’s first quarter. In addition, we experienced headwinds from increased free costs and investments made at talent in key areas of the organization. I’ll provide additional details around FY ’23 SG&A guidance in a minute. Turning to Slide 9.
I’ll touch on adjusted EBITDA and net income. Adjusted EBITDA for Q1 was $5.1 million. The change in adjusted EBITDA primarily was the result of the fully burdened cost of revenues, inclusive of overhead and increased SG&A, offset some by favorable product mix.
Moving on, given our acquisitive profile, we believe adjusted net income presents a more accurate reflection of our normalized performance. On that basis, adjusted non-GAAP cash net income for Q1 was $2.7 million or $0.05 per diluted share. Slide 10 provides an understanding of our capital structure. We have a strong balance sheet and the financial flexibility to continue to invest in our growth strategy. We expect our CapEx in fiscal ’23 will be about $12 million to $15 million, of which about $3 million is related to maintenance CapEx.
The remainder is focused on capturing synergies, improving productivity and capacity expansion to support growth. As you can see on Slide 11, we are reaffirming our fiscal ’23 guidance for net revenue, which we expect to be in the $300 million to $310 million range. This includes an incremental $20 million to $22 million from fiscal 2022 acquisitions. We have revised adjusted EBITDA to be in the $50 million to $60 million range, primarily driven by higher SG&A expenses than originally planned. We believe that Q1 SG&A spend was an anomaly at an elevated level. And while we plan to continue to invest in the business throughout the remainder of the year, we expect FY ’23 SG&A expenses to be in the range of $115 million to $120 million.
With that, let me turn it back to Pat to wrap up on Slide 12.
Pat Roney
Thanks, Kris. In summary, Vintage Wine Estates is evolving as a public company that is better positioned than ever to deliver value. While we have some work to do, we are focused on executing the strategy that delivers industry-leading growth and enhanced profitability. I’d like to thank the VWE team for their unrelenting commitment to our vision of being a leader in the U.S. wine industry.With that, we can open the call to questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Vivien Azer from Cowen.
Vivien Azer
So I wanted to double back on the SG&A commentary that was just offered. I do appreciate the full year guidance. It does suggest quite a normalization for the remainder of the year. But just looking at kind of the quarterly cadence, it’s now the second quarter in a row where SG&A spend has been over $30 million. And I’m just curious like what gives you confidence that the spend this quarter is transitory? And like what was really driving the year-over-year growth in that?
Kris Johnston
Sure. So in Q1, we had some atypical expense that was related to our captive insurance and our acquisitions, and that was driving higher-than-expected costs.
Vivien Azer
But the acquisition-related costs, would it flow through to another quarter or two?
Kris Johnston
No, they were one-time in nature.
Vivien Azer
So Terry, I just wanted to touch on some of the trends that you guys are seeing in your tasting room. Obviously, on the last call, we were coming out of a pretty tough summer. So it’s encouraging to hear that you had close to double-digit growth year-over-year. Has anything changed? Did you guys lean into more consumer engagement to drive that traffic? Do you just feel like consumer trends are normalizing? Any incremental detail you can offer there?
Terry Wheatley
Well, as you saw in the release, our traffic was up 10% over last year. And I feel like, as we’ve talked about, costs are higher in the Napa Valley for travelers. But our — I think people have found that they could stay longer. Their purchases are higher when they come into the tasting room. And our DTC team had done a lot of technology improvements, a lot of outreach that’s going on through our tasting room.
So if you go back before the pandemic, I think we prepared 3 years in advance to enabling our tasting rooms to really maximize on that consumer engagement, capturing information. So when we — when the pandemic hit, we pivoted almost the tasting rooms into call centers, and that’s paid off for us. Those customers have stayed engaged. They’re coming back. We’ve got great experiences. You can go to whether it’d be Kunde on a Hilltop, or over to Clos Pegase. We’ve really just continued with that customer engagement, and we’re benefiting from that. So we’re thrilled with that.
Vivien Azer
Absolutely. And Pat, last one for you. I really appreciate the commentary around the resiliency of the category and kind of referencing back to the Great Recession. Just thinking ahead to next quarter, O&D obviously very, very important for you guys, but the alcohol industry more broadly. Are you guys preparing yourselves for trade down? How are you thinking about the consumer heading into key holiday selling season?
Pat Roney
So we’re actually expecting there will be some trade down. But more of the trade down will be into the price points that we kind of are in the vast majority of our business. This is in that $12.99 to $25 a bottle. And we think that category stays pretty well that the people at the lower end don’t trade beyond to below $10. Yet many of the people in the $50 category will trade down to $25. And in the Great Recession, we were — a benefit of that, and we continue to believe that the overall trends in that category will continue to see some growth and will benefit it. Again, more of the prevailing headwinds that we might see are also in some of the things with labor issues related to FedEx and UPS and wanting to throttle the amount of the deliveries that you can make in November and December with some surcharges. And so we’re going to work our way through that. And we’re excited about the revenue trends, both in wholesale for the first — for this quarter and in the direct-to-consumer.
Vivien Azer
Yes, certainly, a nice start to the year.
Operator
The next question is from Mike Baker from D.A. Davidson.
Mike Baker
So a couple. One, I think usually the first quarter is about 20% of sales. It seems like it will be more this quarter? Or I guess what I’m getting at is, it seems like first quarter sales were much better than expected, yet you maintained the full year guidance. My assumption is that sort of just being conservative a little early in the year to start raising guidance in this environment. But I guess I’d be curious — your comments as to why the big beat and yet you’re not raising? Again, is it just simply too early to raise?
Pat Roney
Well, I think, one, it is too early to raise; and two, there’s also the part, Mike, that the ACE hard Cider actually got a pretty big quarter for them. So that acquisition, we’ll see that, that will trail down a little bit over the next few quarters. We pick up more in the final quarter of the year for us. So I think it’s a combination of those 2 things. And we’re still not sure because of the political landscape and with the interest environment where things are going to go totally. But we’re comfortable with the guidance we’ve given. And if there’s an opportunity to raise it, we’d certainly like to do that at the end of the next quarter.
Mike Baker
Is it fair to say the first quarter was ahead of your plan? I guess it was ahead of our estimates. But my estimates — at least just because we didn’t have that seasonality perhaps exactly right on ACE? But how did the first quarter come in on the top line relative to your internal plans?
Pat Roney
A little bit ahead, but not significantly ahead.
Mike Baker
Second thing I wanted to ask, just about acquisitions. A big part of the story, of course, in the past — and you’re integrating a bunch now. But your leverage, I think, is up to about 5.8x on a gross basis, maybe a little north of 5x on a net basis. Does that cause you to slow down investments and maybe preserve some cash?
Pat Roney
Well, I think as we look at the macroeconomic trends right now, if we make any acquisitions, they’re only going to be right down the middle of the fairway. They’re going to be things that are very, very strong operating businesses that are strategically very fit for us, really right in the middle of the wine category. We do intend to continue to pay debt down as we have. And we think that from an interest rate environment, we’re very well covered with our swaps and the interest rates. And while we see the market going up, the market with the bank’s tightening on credit and some of the things that may create some interesting acquisition opportunities as they did during the last great Recession.
Operator
The next question is from Luke Hannan from Canaccord Genuity.
Luke Hannan
I’ll start with the guidance, so just working a little bit backwards here. So the SG&A guide between $150 million and $120 million. If we assume, let’s say, $25 million of that is going to be depreciation and amortization, that will be added back and sort of working backwards from that. It implies that for the year to get to your EBITDA guidance, you’ll have to do somewhere in the low 40s, I would say, for a gross margin perspective. So I guess, Pat, the first question would be, one, is that sort of a fair assumption based on what you’re seeing in the market, that you think that’s achievable in this environment?
Kris Johnston
Sorry, Pat, real quick. I just wanted to clarify that the SG&A guidance is exclusive of amortization.
Luke Hannan
Right. But it includes depreciation, correct?
Kris Johnston
It does include depreciation, correct.
Pat Roney
Yes, I think we expect there’s going to be continued synergies that we’re going to look at, and opportunities with some of those things. And to the extent that we have other opportunities to cut costs, we’ll do that. But I think the margin — the gross margin trends are somewhere in the 38% to low 40s is where it’s going to be and us to get there.
Luke Hannan
And then my second question is just on — there was commentary in the press release about B2B case volumes not necessarily being indicative of underlying performance. I was curious to know one, why exactly is that the case? And two, what is — I mean, what are really the key drivers for that business, I guess, going forward?
Pat Roney
What — I believe what you’re talking about is the depletions. And because, we’ve got different sizes and different average case rates on the Hard Cider business versus the wine business, we have the acquisition of Meier’s which has no case volume associated with it. And other parts of our B2B business and then the things associated with hospitality and the direct-to-consumer that are also revenue-driving, but not case specific. We just felt that there’s more confusion with that number in terms of the depletion analysis or average cases — average sales volume per case that we felt that other indicators were better indications of the strength of the business, as that business is very, very complex.
Operator
[Operator Instructions] The next question is from Joseph Feldman from Telsey Group.
Sarang Vora
Sarang Vora for Joe Feldman. Organic growth — continuing on the prior question, on the volumes, you look at your organic growth was up about 13%. Can you help us how much was the pricing and how much was the volume from that standpoint of 13%?
Kris Johnston
So we really saw strong growth in our B2B segment. That was really a key contributor as well as in our DTC segment with some of our televised sales. So there’s some pricing. While there’s some pricing impact, I’d say volume is a main contributor.
Sarang Vora
And inventory seems to be down year-over-year by about 10.5%. Any color you can share why you had a very strong sales growth. Is that why? Or there’s any specific reason why it would be down year-over-year?
Kris Johnston
I’m sorry. I missed the beginning of your question there.
Sarang Vora
No worries. Inventory seems to be down year-over-year. So just curious to know if you can share any color on that?
Pat Roney
Inventory is down year-over-year. Is that what the question was?
Kris Johnston
Yes.
Sarang Vora
Yes. Yes.
Kris Johnston
So I think just rolling it forward from year-end where we took a significant charge, that’s what’s indicative of the change. We still have harvest and all of those trends are coming in as expected.
Operator
The next question is a follow-up from Luke Hannan from Canaccord Genuity.
Luke Hannan
Just one follow-up question for me. There was also a comment in the press release about an amendment to your covenants. Just curious if you can give a little bit more detail on what exactly was amended, maybe what those – the new definitions are for those certain covenants? Any more detail there would be helpful.
Kris Johnston
We amended the definition of how we’re calculating our financial covenant around the definition of adjusted EBITDA.
Luke Hannan
Is there — and what exactly, I guess, has changed there, though?
Kris Johnston
I don’t think we’ve gone into those level of details on the covenant previously.
Luke Hannan
Is it — I mean, broadly speaking though, can you say is it more favorable to you guys now than it was maybe a quarter or 2 ago?
Kris Johnston
That’s accurate. Correct.
Operator
This concludes the question-and-answer session. I’d like to turn the conference back over to Pat Roney for any closing remarks.
Pat Roney
Well, again, thank you, everybody, for taking the time to get on the call and hear a little bit more about Vintage Wine Estates. And we appreciate your time and look forward to talking to you again in the very near future. And I don’t know what your plans are tonight, but having a nice bottle of Kunde Chardonnay or Girard Sauvignon Blanc or Clos Pegase Pino or an ACE Hard Cider would be a great thing to do today. Thanks for your time.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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