Newage Inc (NBEV) 2017 Q2 法說會逐字稿

Good morning, and welcome to New Age Beverages Second Quarter 2017 Results Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Shaun Persaud.

Please go ahead.

Thank you.

Good morning, and thank you, for joining New Age Beverages Corporation's second quarter 2017 results investor conference call for the period ending June 30, 2017.

I am Shaun Persaud with Amato and Partners, the Investor Relations counsel for New Age.

I'd like to welcome you all to the call today and to thank you all for joining.

On today's call, we will have Brent Willis, Chief Executive Officer of New Age Beverages; and Chuck Ence, Chief Financial and Administrative Officer.

On our call, Brent will provide some opening comments.

Chuck, will provide an overview of our second quarter 2017 results and then turn it back to Brent, who will discuss operating performance, year-to-date and progress on New Age's emerging competitive advantages.

We will then open the call to questions.

We remind you that this conference call contains certain forward-looking statements, reflecting management's current expectations regarding future results of operations, economic performance, financial condition and achievement of the company.

Forward-looking statements, specifically those concerning future performance, are subject to certain risks and uncertainties.

The transcript of today's conference call will be available on the company's website within the Investors section at www.newagebev.us.

I would now like to turn the call over to Brent.

Improved gross margins, 28% increase in investment behind our brand yet still lowering operating expenses as a percent of sales overall.

Positive EBITDA of more than $2 million and revenue growth of over 1,800%.

This is what we are supposed to do, what we said we would do and what we have done.

Not perfect by any means, but real quality of results.

When we started on this endeavor a full 15 months ago, it seems like a long time because we've been working 24/7.

The company was a nascent $2.3 million in annual revenue and, honestly, had no execution capabilities whatsoever.

What we did have was a vision, a plan and against that, so far, we have delivered.

Now 15 months later, we have a business platform with a national distribution network, a national sales force, a national manufacturing footprint, and the supply chain marketing, R&D and finance and systems capabilities to provide the foundation for New Age to accomplish its objectives and build a real quality and scale company.

Now on a very personal basis, I have learned that with smaller high-growth companies, financial flexibility and strength is fundamental.

Without it, you have a very high risk almost uninvestable asset.

At New Age, we really got it right with a tremendous set of quality long-term institutional investors, and I know with certainty, more that would like to come in.

We have a balance sheet that for small cap companies just does not get any better, with $18 million in current assets and $7.6 million in current liabilities and total assets of $69 million versus total liabilities of $13 million.

We have 34 million shares outstanding with only one class of common stock.

In the quarter, we had actually eliminated all the debt down to 0, but assumed a note of $1.5 million as part of the Coco-Libre acquisition in the quarter, but still overall, de minimis.

We generate cash.

We have positive EBITDA and are funding our own growth and then a healthy P&L that is getting better with improved gross margins in the quarter, reduced costs of goods sold and reduced operating expenses as a percent of sales.

One of the targets for the company and one of my personal targets for the board for 2017, is EBITDA margin improvement.

So we're working hard to improve it.

We have de minimis debt, a line of credit from U.S. Bank based on that $18 million of inventorying receivables that is at roughly LIBOR plus 2. So I would say that it's a pretty reasonable surrogate of the definition of financial flexibility.

In summary, to go with an increasingly strong business platform, we have an increasingly strong financial platform, and investors are starting to see the evidence of that in current operating performance that frankly wasn't there historically looking backwards, as we were building our platforms to this point.

But if you have the business platform and financial platforms and the brands in the growth categories and a clear strategy, what else do you need, right?

Well, the answer is a team to both execute strategically and operationally.

At the strategic level, the capabilities and backgrounds of our board are above contestation.

At the operational level in senior management team, there is an average of 20 years of successful experience in the beverage industry and almost 150 years collectively.

Clearly, success being about the collective, the galvanizing of that team on a single-minded mission, focused and motivated, which we are.

Clearly, not about me or one person individually.

I play my position for sure, but I can tell you that I'm honored to be part of this team, and no one can logically argue with this team's success over the past 15 months.

After Chuck takes you through the details of the financials, I will discuss progress against our strategic priorities and our 3 emerging competitive advantages.

But before I pass it over to Chuck, to be consistent with what we have done on previous investors calls, let us please list our top 10 operational results for the quarter.

Number one.

We closed the Marley Beverage Company acquisition and have now fully integrated it and converted it to profitability versus a loss-making operation on a stand-alone basis before we acquired it.

Because of the acquisition, organizationally, we gained a new corporate controller, new head of manufacturing, new head of sales, a national sales force and other A players and strategically gained penetration into ready-to-drink coffee, with the brand with real global awareness.

Number two.

We fully integrated the Coco-Libre acquisition, and converted it to profitability versus a loss-making operation on a stand-alone basis before we acquired it.

The Coconut Water category is the second fastest growing category in the beverage industry, and we now have a competitive positioning in it, with one of the top 5 brands.

Number three.

We also acquired and closed a premium macronutrient acquisition.

This is a game changer for New Age because we are one of the only companies in the beverage industry with intellectual property and patents.

We have heart health, brain health, diabetes treatment and environmental and radiational protection patents and products that are all very topical right now with all the current political rhetoric.

Number four.

We expanded internationally to close-in international markets.

In Canada, we expanded key brands in the portfolio to the top of 3 retailers in Canada.

Loblaw's, Sobey's and 7-Eleven.

Just an example, sales in one of those 3 accounts are just one of the brands Búcha Live Kombucha are averaging over $1.1 billion already on an annualized basis.

Number five.

We expanded our new shelf-stable Búcha Live Kombucha brand to other major retailers within the United States, [ATB], [Ahob], Kroger and others.

These are some of the biggest and best retailers in the country and form the basis for further expansion and distribution so we can then invest in marketing to transition from awareness of the brand to consideration set, to trial and conversion.

The next phases are brand building.

Number six.

Because of some of our expanded distribution on components of our portfolio, we are now able to begin investing in our brands.

As such, we increased marketing and social media investment by 28% versus the previous quarter.

And did so while reducing overall operating expenses by 2 points as a percent of net sales.

For me, this is exactly the right direction on shifting investment and expense discipline that the company needs to pursue.

Number seven.

On the brand front, also, XingTea, a key piece of our core portfolio, expanded with 7-Eleven in the United States, initially, in the Heartland Division across around 1,500 stores.

But it's an important inflection point as retailers transition to higher margin, better-for-you products versus the other pre-priced, low margin, high-fructose-laced competitors.

Number eight.

Operationally, we also looked at and just said no to 5 other acquisitions.

Why is this important as one of our top 10?

Well, first, we are not an acquisition roll up.

It is not our strategy at all.

Anyone that espouses that is misguided, agenda-ed and superficial, frankly.

We needed a platform, we needed scale and we had and have the expertise on how to derive value from acquisition.

One should realize that acquisitions and acquisition integration is hard work.

Delivering full value does not happen in 1 month, 3 months or sometimes a year.

On the acquisitions we have made, yes.

We have done the first things on cost synergies and revenue synergies, and now we are onto the next thing, the harder things, new sourcing, warehousing integration, value engineering, scale leverage and others on the cost side; and brand architecture, new products and brand building on the revenue side.

Let's face it and be negative or caustic for a moment.

None of our brands are leaders in their respective segments, none of them.

If they were, we would have paid 10x revenue, like others are.

Not less than 1x revenue, seriously.

All our brands compete against deep-pocketed, multibillion-dollar competitors and they, those competitors, sometimes have more resources, more capabilities, more distribution, a lot of strength, except for speed.

More innovation, more motivation and more insight into consumers.

Retailers are gravitating to smaller companies and consumers are Brexit-ing traditional major consumer goods companies and their brands.

New Age is being recognized in the industry across all walks for not compromising, for being fast and right, for being the only, the only pure play, healthy functional beverage company with the scale, with the credibility, with resources, with an ability to invest, with profits, funding its own growth, with a track record, with trusted people and good relationships, with execution capabilities, with branding and marketing and innovation expertise, with a full portfolio, all in the growth segments of the industry.

Retailers and distributors do not want to deal with the 3,000 nascent beverage companies in the United States.

They don't have the time and they don't have the risk tolerance, given the changing dynamics in traditional retail.

So we believe New Age is in an enviable and unique position with a great opportunity.

We will not buy our way to success.

We will earn our way to success.

In the organic new product and brand-building activities behind our original and newly acquired brand platforms coming out now and throughout the rest of the year is, in a word, powerful.

That's how you derive value from acquisitions.

And number nine, in terms of operational growth and activities for the quarter.

In one respect, I feel a little bit embarrassed to continue to beat our chest on the good things happening in the company.

We think it's good to be humble and quiet and extremely conservative on establishing expectations.

But on the other hand, we are unapologetic and very proud of our associates.

And we want everyone to know the really, really good solid substantive things happening that are both visible and sometimes less visible, like for example, the new national 5% reduced shipping contract, the consolidated warehousing, the new sugar contract that saves $0.05 a pound, the semi-constructive influence that we provided and negotiated with new flavor supplier and gained new terms that saved $150,000 annually, the national manufacturing alignment that saves $180,000 annually and our improved work on just-in-time inventory management and inventory control.

And those things have resulted in less than 1% variance in our physical inventory count while maintaining a days on hand of less than 30 days.

Benchmark against any CPG company on the planet, and that is in the top 1/2 of 1%.

And finally, number 10.

All of the work across every function, across every day, across every person in the company, that has led to $16 million in gross revenue for the quarter of 1,876%, cost of goods sold down to 71.5% of net sales versus 73.5%, just in the last quarter.

And total operating expense declined to 24.6% of net sales versus 26.5% in the prior quarter, with a 28% increased investment and marketing and $2.5 million in net income.

Our investors know that every one of the small cap public beverage companies, that are in our peer group, lose money.

Everyone, except New Age.

And with that, I think I'll pass it over to Chuck Ence, the Chief Financial and Administrative Officer tell you how and why.

Chuck?

Thanks, Brent.

I hear from investors all the time that they are amazed at how much we have done in such a short period of time.

We don't see it that way.

For us, this speed and pace is our normal pace.

And we see it as what we are supposed to.

Yes, no one else is executing at our pace and at our level of performance, but that is their problem.

We have nearly done what we said we were going to do and we don't see any reason to change our model.

Don't forget, it was only 4 months ago when we uplisted on to the NASDAQ.

Since then, completing and closing 3 acquisitions, driving further organic growth, launching new products, reducing costs, improving margins, growing top line 1,500% and delivering $2.5 million in EBITDA, is adjust our normal course of business.

Let me now take you into the details of the second quarter 2017 financial results.

These results include Coco-Libre for the quarter, but only a small amount of the Marley performance as we do not close that acquisition until June 13.

For the second quarter 2017, consolidated gross revenue achieved $16,038,264 versus $811,740 in the prior year, a 1,876% growth.

Subtracting discounts and bill backs at the net revenue level, the group achieved $15,104,795 versus $686,740 in the prior year.

The significant growth reflects the small scale of the business in 2016.

Apples-to-apples pro forma organic revenue was up 6.7%, in line with New Age's organic growth model.

All divisions and brands contributed well, with the DSD division having its best 3 months in history, delivering over 710,000 cases in the quarter, up 7% versus prior year, which was already up 11% versus their prior year.

That division has been expanding well, adding both nonalcoholic brands to their portfolio including Nestea, essential water and others and a number of beer brands to the portfolio including Odyssey Beerwerks.

That expansion both improved breadth and distribution in portfolio and a number of accounts and depth of distribution with improved quality and point-of-sale activation.

We're lucky in that, when for example, the Nestlé and Coca-Cola partnership ended, New Age, at least in Colorado and surrounding markets, is the biggest and best and consequently natural choice to gravitate to.

International, and especially Canada where we started to contribute in the quarter with expansion to the big 3 there and overall, we have a number of a fire stoked in other markets that we expect to catch on.

The U.S. division is now also gaining momentum with the brand-new expansion of XingTea in 7-Eleven, Búcha expansion nationally, with some very quality large account and the additions of the Marley and Coco-Libre portfolios through our DSD partnerships and retailer partnerships.

It is hard to see on the P&L, looking back the impact because we have just gotten these businesses.

We're looking forward.

We start to see the revenue synergy impact, especially with the new products coming out on each of the newly acquired brand platforms.

In gross profit, excluding shipping expenses, our firm delivered $4,120,544 versus $347,476 in the prior year, up 1,978%, reflecting some of the initial impacts of COGS improvement.

This resulted in gross margin percent of 28.4% versus 26.4% in the prior quarter and versus 21.4% in the prior year.

Shipping expense this quarter was higher than normal at 4.8% of net sales as we merged in the Coco-Libre operation and incurred their shipping burden as part of the integration.

Total operating expenses were down to 24.7% of net sales, versus 26.7% in the last quarter and 197% last year.

In addition to the discipline of good performance that this reduction in OpEx represents, the most quality thing about the result is that marketing expenditure was up 28% while still overall reducing OpEx as a percent of net sales.

Net income for the quarter was $2,496,682 or $0.08 per share versus a lot of $2 million in the 3 months of the prior year for the stand-alone small Búcha company.

EBITDA for the quarter was $2,778,330 and adjusted EBITDA was $2.95 million when taking out the onetime nonrecurring Marley expense of $175,000 before we took over and consolidated the business in the last few days of the quarter.

There were a number of other onetime, nonrecurring expenses associated with the acquisitions, transitions, integrations and closing of Coco-Libre, Marley Beverage Company and Premier Micronutrient Corporation during the quarter that we have just absorbed these in overall OpEx versus breaking them up separately.

Comprising the detail with our earnings is a combination of operating results and onetime other income impacts.

This has always been the case with this New Age foundational company for the past 5 years consistently, contributing roughly $500,000 to $1 million a year in brand and another onetime sales impacts.

And we expect that to continue.

On the balance sheet, we now have receivables and inventories of $18.2 million versus current liabilities of just $7.6 million, of which $1.25 million is a contingent liability on the condition we grow the Marley business to $50 million in revenue.

When that happens, there will be a corresponding increase in inventory and receivables in current assets.

From total asset's standpoint, we now have $69 billion in assets versus total liabilities of $13.6 million.

In the quarter, we had paid debt down to 0, but took on the Coco-Libre note of $1.57 million as part of the acquisition.

And overall, we have $55 million of shareholders' equity.

From a cash flow statement, we generated positive net income for the first 6 months of the year of $1.8 million.

Our working capital ratio of 2.4, when dividing current assets of $18.2 million by our current liabilities of $7.6 million is extremely healthy.

And the overall adjusted EBITDA of $2.9 million is equally enviable amongst small cap beverage companies.

We are using our free cash, we think, intelligently to increase our inventories consistent with increased demand and investing in the infrastructure and organic growth activities, including new brands coming on stream to take the business to the next level.

In summary, looking at the financial performance for the quarter, there are a few important takeaways.

Number one.

We have a quality of financial results.

The top line of 1,876%, 6.7% organically, reaching $16 million in gross revenues for the quarter, before incorporating really any of the Marley numbers.

It's a very good top line.

Number two.

Gross margin increasing from both mix and value engineering standpoint, up almost 10 points versus prior year and up 1 point alone versus the first quarter of this year.

Number three.

Operating expense down to 24.5% of net sales, down 1 point versus the prior quarter and down like 150 points better than prior year.

Number four.

Balance sheet, unbelievably clean with one class of common stock, de minimis debt and $69 million in assets versus just $13.5 million in liabilities, some of which are contingent.

Number five.

Financial flexibility with an unaccessed U.S. bank line of credit based off of inventorying receivables at LIBOR plus 2, our recently filed S-3 in the case that significant opportunities come our way, none of which are currently foreseeing, but at least we will be ready to take advantage of it.

And with that, I'd like to pass it back over to Brent to give you some of the additional business highlights.

Thanks, Chuck.

And for the remainder of today's call, we're going to talk about progress against our 3 emerging competitive advantages.

The first, competitive advantage.

Our emerging capability to intelligently and attractively acquire new brands and companies.

This quarter, we completed and closed 2 acquisitions on top of the 1 that we did on the last day of first quarter.

I say we're not an acquisition roll up, and some investors might be thinking, yes, right, that's not congruent with your actual behavior.

We do have an emerging core competency of acquiring well and then being disciplined and focused on deriving value through synergy capture.

Personally, even though I had done a number of acquisitions before, the model we employ is the one I learned from the Brazilians at Ambev, a company I used to be on the Board of Directors of.

Those guys are incredible, unrelenting and they have taken a lot of those models that we developed at Ambev and AB InBev to what they called their 3G group.

And they have had pretty good success in replicating the model.

We at this NBEV, frankly, are not doing much different with the fundamental exception of we know how to drive top line growth.

In the last quarter, we finished closed and began integration of 3 acquisitions.

Coco-Libre, the Marley beverage company and the Premier Micronutrient Corporation.

Strategically, Coco-Libre gives us a leveragable brand in the second fastest growing segment in beverages.

Now less than 3 months after the acquisition, it is profitable on a stand-alone basis.

We eliminated some unprofitable customers, we eliminated 100% of the headcount from the Maverick Brands organization, and we believe there are significant further savings to be gained in sourcing improvement, warehouse integration shipping and other activities, all of which we are currently actioning.

With Marley, we've now fully integrated the business and organization.

That company had some A player executives in it, who have incorporated them in and 3 of their key members are already on the company's executive leadership team that runs the firm.

Marley too is also profitable on a stand-alone basis, as of our integration with them happened, organizationally before we technically closed in the last 16 or 17 days of the quarter.

Their Microsoft Dynamics ERP system, for example, is now becoming the ERP system for New Age, and we're implementing that to improve our efficiency and effectiveness between now and the end of the year.

Brand-wise in Marley, we are rolling out the new brand identity and iconography.

With the new organic Marley Mate product, that is currently in production.

This is a 100% certified organic product that leverages the awareness and resonance of Bob Marley in a way never done before for the brand.

We have the insight that the live, love, Marley campaign being launched resonates with millennials and leverages what Marley is all about.

We are happy to announce the new news that a major national convenience chain, with almost 10,000 stores in the U.S. alone, has just agreed to take on Marley Mate, and shipping begins to this customer on the 28th of August.

As many of you know, New Age has never really had any national distribution and had most of its strength regionally in the West.

Now with the national presence for Coco-Libre and Marley, that is changing quickly and they frankly pull our other brands from a retailer penetration standpoint.

Worst case with Marley Mate, we expect an average of about $1,000 per store per year in wholesale revenue, so this new product will have a material impact as it rolls out nationally between now and the remainder of 2017.

And this is just the first customer, but this is what it means when we say revenue synergy and how we drive value from our acquisitions with those new products within these platforms.

With Premier Micronutrient Corporation, our third acquisition, we're just getting our hands around it now.

Our Board of Directors has been clear, use the patents and commercialize them or license what you're not going to use.

And we now have 12 patents, as one just recently issued after completing the acquisition.

We have set up our Health Sciences Division, have allocated some of our best and brightest executives to lead the division and are working with the medical channel partner to bring the expertise and resources to our go-to-market approach with this portfolio.

But that's our first emerging competitive advantage.

Our second one is the ability to drive superior organic growth.

Why?

Well, that's just because we're competing in the top 5 growth categories in beverages, but within those categories, we believe, that through the combination of our distribution network, our retail partners, partnerships, the consumer-connecting activities including social and digital and experiential activation and the new products with our core franchise is being Marley, Coco-Libre and Búcha that we can outpace category growth.

Have we done it yet?

No.

Do we see it coming?

Yes.

And do we have the early visibility on it coming?

Yes.

We already see it materializing on Búcha as it expands nationally and the initiatives on Marley and Coco-Libre are expanding and rolling out now, some of which major national retailers have already given us the green light that will truly represent our first national pervasive distribution.

Our third emerging competitive advantage and the final one I want to talk about today is our ability to leverage our research and development expertise to launch breakthrough new products.

Our PediaAde product rollout and production actually begins next week.

Our Aspen Pure Probiotic is rolling out to new customers on the East Coast in September, and we now have a number of other new products in the queue, within our newly created Health Sciences Division that you can see at www.newagehealth.us.

This is our future and we think the future of healthy beverages.

Our core businesses are great and we're investing and growing in them.

Let's face it, they compete against those very large competitors in every one of those segments.

We love the fight, to win with consumers, but make no mistake, it is a daily fight.

So we also like to compete strategically, in less competitively intense segments, where we can win.

And better yet, where we rather define new segments and pursue new channels that our competitors aren't even thinking about.

This is our what our Health Sciences Division is all about.

And the engine for growth is the wealth of our patents, 12 of them now, gained via the Premier Micronutrient Corporation acquisition that underpins this division and our new product pipeline for the foreseeable future.

Some of you may know that we have a radiation protection product developed for the U.S. military.

We already have the studies and we already know the benefits for protection from x-rays or equivalent x-rays every time somebody jumps on a plane, but it just so happens that radiation protection is very topical right now.

And we are not aware that any of our competitors have a product like that and actually parts of the team has recently just returned from Japan and Korea where there is significant interest in this product for obvious reasons.

But to manage expectations for this division, I would not model any revenue over the next 12 months from products in this division except for PediaAde, Aspen Pure Probiotic and our enhanced recovery surgery beverage that is planned for later in the year.

Even then, for the time being, I would be conservative as our approach is one of sustainability and depth of the penetration to become the standard of care and that really takes some time to really stick versus broad scale, short-term distribution that would have a bigger short-term impact.

Also to manage expectations, we think that, for the first time in just this quarter, you're starting to see the strength of the balance sheet and financial flexibility that we had envisioned, starting to see it.

But we also believe for the first time in just this quarter, you are starting to see how our P&L years, although it's still not fully evident, yet with the exception of the June month, given all of our acquisition and integration expense that we just absorbed as part of the P&L.

It is going forward with the quality of the P&L improving, driven by our organic growth activities, many of which we have talked about today.

Does one see superior organic growth looking backward?

No, not really.

We're just keeping pace with the categories in which we're competing.

And that is not winning in our book nor is it acceptable.

Our big drivers, including the new Marley Mate and 5 other major organic growth initiatives hitting The Street eminently from PediaAde to Aspen Pure Probiotic to 2 to 3 other big deals are expected to materially impact our core business throughout the remainder of this year and beyond both strategically, from a brand health and brand awareness and brand resonance with consumer standpoint and financially.

So in the summary for today's call, we believe we are continuing to move in the right direction and are executing well.

Our leadership team has the depth of experience in the beverage industry, our balance sheet and P&L and financial flexibility is strong and getting stronger, and our business platform, our manufacturing footprint distribution network and retail relationships are also strong and getting stronger.

But all I see that today we have is a platform, a foundation, a demarcation point.

But it does give us the legitimacy to really build something of quality and scale.

Will we continue to do acquisitions?

Of course.

If we've already done 3 this year and we now believe that we have the capabilities to really derive value from them, it would be disingenuous to say that, that is it just going to stop.

They will continue, but we will be extremely diligent on value and accretive impact, like we have done here too for, and we'll be extremely diligent on strategic fit to support our goal of becoming the world's largest healthy functional beverage company.

Anything that does not fit that definition will not be allowed in our system and we will just not compromise our values, our identity or our purpose to make a difference for consumers with healthier alternatives.

On our foundation, our business platform, and through that, we can positively drive new companies through it, but we're equally as excited to drive our core brands and our new products through it, and that drives superior nondiluted value for our share owners.

Our brands and our organic growth activities in marketing are now beginning to take shape and we're making money no matter how we are doing it, we are still making money.

As far as we can tell, of all the small cap public beverage companies out there, we're the only one with positive EBITDA, and I can tell you this, we will continue to drive positive EBITDA for the rest of the year.

And with that, I'd like to now turn it over to questions.

(Operator Instructions) Our first question comes from Anthony Vendetti with Maxim Group.

Just wanted to -- so I just wanted to talk a little bit about the gross margin.

I know as you've closed these acquisitions of Marley and Coco-Libre, pushing some of these brands through your DSD network as well as some of the new products of have coming online, you're going to be at much higher margins than your DSD network.

Should we see those margins starting to move up as we move into the third and fourth quarter?

And then if you can just talk about, I think you mentioned 7% but I just want to make I had that right.

What percent of the revenue right now is the DSD network?

And did it grow 7%?

Was that the right number year-over-year?

I'm going to ask -- thanks for the question, Anthony.

So yes, that is right.

The DSD network grew 7% year-over-year and that is in this quarter that's on top of an 11% growth that they did the prior year.

So that division continues to deliver, but as you pointed out, that division delivers at about a 25% to 27% gross margin.

But that's on that side, so what changes the overall gross margin for the company and how we got to, frankly, a 28.4% this quarter when you take out that onetime with the Marley expense and not including shipping, what's driving that is the easy stuff like mix change and the Marley franchise and Coco-Libre are both at 40% gross margin.

So they previously done some of the work to improve their gross margins unlike what we have done -- have not done on New Age.

So they're at 40% and we're doing certain things from a sourcing, warehousing and production standpoint and value engineering and scale standpoint on those franchises to take them to a different level.

And then on the remainder of the franchise, that is also moving up as we get the benefit of scale, manufacturing consolidation and warehousing consolidation, really around 3 warehouses across the country.

But the short-term benefit is from a mix standpoint that took us to 28% -- or 28.4%.

I would just mention one other thing and then I'll shut up here but with all of the -- our 3-year target is to hit a 40% gross margin target.

We now believe that we'll be able to hit that sooner.

And every one of the new products that we're doing, not just in the Health Sciences Division, but others, have in excess of a 50% gross margin.

And then, we also penetrating some new channels that don't have the same cost of doing businesses, traditional grocery and retail.

So the combination of all of those things, and you have to do 100 things, really move the gross margin in the right direction.

But our 3-year target was 40% and we now see an ability to achieve that faster than our original strategic plan envisioned time frame.

Our next question comes from [John Harrow] with [Harrow and Associates].

I have a couple of questions.

Can you talk about sell-through rates for your various brands versus your expectations?

And then what we should expect from current M&A opportunities?

On sell-through rates, I don't know how to give you one answer, John.

I'll give you an anecdote.

So we launched Búcha Kombucha in the 7-Eleven in Canada.

And our expected sell rate was about 2 units per store per SKU per week.

And that is where you have to meet to maintain authorization and listing.

So that's the cost of what you have to reach.

On average, we're doing 8 units per store per week.

So 4x our expectation.

And around college campuses and college locations where you have younger target audiences, we're doing 28 units per store per week.

So financially, we're really attractive above our expectations on the resonance of that brand and we see some of similar kinds of movement with some of the new retailers at we launched, too, in the United States on that brand.

On the rest of the portfolio.

It's -- I would say I'm not satisfied with our level of sales per point of distribution, and ultimately, delivering revenue as a combination of 2 things, one, level of distribution and then your sales per point of distribution.

And this is why all of our activities are geared from a marketing standpoint against AB's new products to be winning at the point-of-sale, which in the beverage category is where more than 80% of brand choice actually happens.

It's not sitting at home, it's not when you hear advertising.

You didn't have the point of sale.

So we're executing toolkits and -- kind of a common toolkit around every one of our brands to really share of wallet at the point-of-sale.

And that growth today is equating to 6.7% organic growth.

That's just okay.

But it is not at all what we want to do so the activities that we're doing to drive sell-through by really activating at the point of sale, while continuing to do the social and digital and other marketing activities.

That's really a big part of our focus going forward.

And the combination of that plus expanded distribution now for the first time really on the national basis is what will deliver the organic growth that we're looking for.

So that's on the sell-through.

could you ask the question again, John, on the M&A and acquisition?

Yes.

Just exactly what shareholders should expect from current M&A opportunities that may be out there?

So the first and maybe only thing that I'd say is anything that we're going to do is going to be accretive for shareholders.

I think our investors know or our substantive investors know that management is in the exact same boat as they are and we want one thing, and that is to drive the value of shares and drive wealth creation for shareholders because that's how management benefits.

So our interests are 100% aligned.

And we hate that D word, dilution.

But in some cases, we may accept some dilution if and only if you see the real clear pathway to driving incremental value and accretive value for shareholders not over the long term because we think that's BS.

But actually, in the short term with real, real cost synergies and then the real revenue synergies that drive the value from the acquisitions.

So we still have ones that we are looking at, certain ones that we have said no to, as I mentioned on the call, but I tell you there a lot of companies that, a, would either like to acquire in New Age because we have access to all of the growth vehicles in the beverage industry and we're a one-stop shop, addition for them.

But at the same time, there's a number of companies that would like be part of our system that we either just say no to, or we seriously can consider if they strategically fit with our definition of healthy, functional beverages with no compromises and if they fit our very stringent financial conditions.

Got it.

And listen, lastly, hitting on the point of big companies getting away from carbonated beverages.

Are you aware of any larger companies out there taking a close look at you guys for possible acquisition on down the road?

I can't really talk about it, John, but I will tell you that the declines in carbonated soft drink industry are continuing, but I don't think they're really going to come back.

At the same time, the major companies are changing their definition of what they compete in to say, "look, we don't compete in carbonated soft drinks, we compete in sparkling." And they're trying to change that definition and they're all moving towards healthier beverages.

If you look at the breakout companies, the 5 companies that have grown the fastest in the beverage industry over the past year, of the top 60, they all have a couple of common themes.

One of those themes is, a, they've had financial flexibility, and the second theme is they have all pursued healthier alternatives, whether it's Body Armor, whether it's by -- whether it's CELSIUS to a lesser degree, whether it's Hint Water or ourselves, we have all taken advantage of that.

And against those breakout companies, we're the only one that is not kind of a one-trick pony.

We're the only ones that have a full healthier beverage portfolio that, frankly, retailers really, really like, distributors really, really like because they just don't have the time or they're risk adverse these days that they do want to deal with national strong players with the resources and the ability to invest in growth franchises, they're going to be there for the long term versus all of these kind of one brand smaller companies that are trying to break through.

So we're in a really good position both as a potential upset for majors that have broader global distribution systems but also as just a solid platform.

You don't, still, you don't see all of the financial benefit from our platform because is just starting to accrue.

You would in June, but that's after we've spent all the money to acquire and integrate Coco-Libre and Marley and those kinds of things and we don't report just the month of June.

So we now see that P&L really starting to gear, really starting to work as a platform as a stand-alone company because we have the scale, because we have the brands, because we have the relevancy and are really disciplined from an OpEx standpoint, but all those benefits will continue to accrue.

But this is really the first quarter that you're starting to see that impact from a stand-alone, strong platform company to drive real value in and of itself.

So that's really our focus, John.

Our next question comes from [David Cannon] with KWM.

[Mr.

Cannon], you are on the podium.

Is your line on mute by any chance?

All right, then we'll go to our next questioner, [David Barr] with [Standard Valuation Services].

Yes.

You noted that on August 28, Marley Mate will roll out.

When will the revenue recognition occur for that, third quarter, fourth quarter?

A mix, any kind of a split?

Yes, so the margins on this new product and it's the first organic product in the Marley franchise.

It's very low sugar, very elegant, delicate product versus some of the other Mate competitors that are out there, is well north of 40% margin so it will have positive mix impact.

Revenue gets recognized immediately and so in the third quarter, you'll start to see, across the first couple of thousands stores in the third quarter for about 3 weeks, frankly.

So you won't see it that much in Q3, but healthy margin products and you'll see some pipeline fill.

You may get a little bit of pipeline fill within Q3, but you'll get plenty of the pipeline fill within Q4.

So the revenue recognition will -- you'll really start to see that it in Q4, in Q1 next year when that rolls out.

But that's not the only one.

So I don't want to communicate the other thing that we've already gained a green light from national retailers on because I don't want to communicate what the new products are until they're ready to go out the door.

And if the retailers don't change their minds, so we've got some -- this is just the first one on which we gained the real positive endorsement from this first major national retailer, but you'll see the income accruing and really in Q4, and you'll start to see a little bit of result in Q3.

Okay.

Are we going to have a cash problem with 5 major rollouts?

No, we won't have a cash problem, but I don't expect to see our cash balance increase significantly because we're using that cash and that additional revenue and profit that we're driving.

We're just spending it back.

Are we going forward spend?

Probably not, but it's not our model and that's just a bit too risky as a proposition for us.

So we're going to keep our cash balance really low.

But the other thing that I said is don't forget, we have this line of credit at LIBOR plus 2 that's basically 75%, 80% of our $18 plus million of inventory receivable.

So we have the money and the financial flexibility if we see real opportunity to invest, but we're going to be really conservative as we roll this out from a pre-investment standpoint.

Okay.

As far as consumer engagement in the social media world, any plans to get that going again?

We have a social media team, internal, and we're now negotiating with more and more influencers.

We probably will never do the big sponsors or the big endorsers like some of our other brands.

We don't really believe in borrowing those kind of equities, but we already have in Mate, for example, a pretty reasonable endorser in Bob Marley, with his 74 million Facebook followers.

And we're working more and more closely with their team to leverage that social media engagement behind the Marley franchise.

We're also doing it with Coco-Libre, we're in a number of TV and movies and those kinds of things, and we're also engaging our influencers there.

But across the board, we've probably put in, people don't really see it, but 4 or 5 pieces of content and influencer content behind each one of our brands every single week.

So that's a pretty good set of activities to really drive content, and that's what really drives social media engagement is the quality content.

So we're doing those kinds of things and we're doing some other things that we'll tell you about next quarter that will be of real significance in terms of new routes to engage with consumers and educate them on our brands and why they should use our brand versus carbonated soft drinks, for example.

So we're doing a bunch on the social and digital side, but also now more on the experiential side, with our distribution partners in places around the world.

And many of our distribution partners are big bud houses and they're doing events with their brands every single week so we're just piggybacking on some of those.

All right.

And last question.

As far as your Amazon, your storefront, can you give any color how that's rolling out right now?

We have rolled it out, it's just okay.

But within the whole e-commerce side, I mean, millennials, I think the numbers are 30% of all millennials have purchased some online beverages already, but still 90% of all beverages are more than 90% of purchased in traditional retail.

That said, the dynamics are changing.

So you will see a lot more from us both within Amazon, because we recently improved our storefront and we're probably ascending, I don't know, a couple of truckloads a week through Amazon Now, so that is a good start and fundamental change versus last year, but it really is just a starting point.

And I think you'll see more from both the Amazon site and -- which is hard to get right, and more from a direct e-commerce site, from us going forward.

And if I benchmark ourselves against one company Hint, for example, that really disintermediated with an e-commerce model.

And if I look at CELSIUS for example, I mean, 30% of their business goes through Amazon and e-commerce.

So -- and the 30% of $22 million, so let's say that $8 million for that company, that goes through the e-commerce channel.

Historically, we've had 0, so our target is 30% of our business to go through the e-commerce channel and that's all wide open, untapped space on which we're putting a lot of resources on it.

But I intended not to talk about it as part of this call because I want a positively surprise for next quarter.

So -- but I would look every day on New Age dot com for buy now, shop now because it's coming imminently.

This concludes our question-and-answer session and today's conference.

Thank you for attending today's presentation.

You may now disconnect.

Thanks, everybody.

Thank you.