Newage Inc (NBEV) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the New Age Beverages Fourth Quarter 2019 Financial Results Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to turn the conference over to your speaker today, Scott Van Winkle from ICR.

Please go ahead, sir.

Good morning, and thank you for joining New Age Beverages Corporation's 2019 Fourth Quarter and Full Year Financial Results Investor Conference Call.

On today's call, we will have Brent Willis, Chief Executive Officer; David Vanderveen, Chief Operating Officer; and Greg Gould, Chief Financial Officer.

I'd like to remind everyone that this conference call may contain forward-looking statements reflecting management's current expectations regarding future results of operations, economic performance, financial condition and achievements of the company.

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

Factors that could cause these results to differ materially are set forth in our annual report on 10-K filed with the SEC.

Any forward-looking statements we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

During this call, we may present both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, which is available on our website at newage.com.

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

I'd now like to turn the call over to Brent Willis, Chief Executive Officer.

Thanks, Scott, and thank you, everyone, for joining us on the call.

Before we get into 2019 performance and our major activities in 2020, I want to share some overriding perspectives on the company and our business.

We believe that we have a very good business and tremendous and unobstructed potential.

Let's align first on the things that are virtually impossible to argue with.

We have a strong balance sheet, very little debt, assets of north of $250 million and cash north of $60 million.

We have an infrastructure in 60 countries around the world and access to all those opportunities in growth, and we only sell healthy products, mostly fulfilled by e-commerce directly to consumers' homes.

Let me reiterate that.

We only sell healthy products sent directly to people's homes.

Now there are a lot of businesses and industries that I'm not sure I would personally want to be invested in right now, but I believe we are extremely fortunate to be in the business we are in with the business model and channel access we have with what's going on in the world.

Because of how we have evolved, because of what we have done, and how we have built the company from scratch 3.5 years ago, because of that, we are up worldwide year-to-date in 2020, yes, up.

And I am not sure that there are many businesses that can make the same claim right now.

Consumers are nervous.

Investors are nervous, and it's understandable.

But in that context, I believe New Age has a responsibility.

Yes, we have an opportunity, but moreover, a responsibility to live our mission, to educate and inspire the planet to live healthy.

It's why we created the company in the first place and living up to that mission is of the utmost importance now more than ever.

Greg Gould, our Chief Financial Officer, is going to share our 2019 operating performance with you in just a minute.

In fact, we transformed our business in 2019, growing nearly 5x to a scale of more than $250 million.

Now that's one way to look at the business fairly.

And on that scale, we now have a 60% gross margin, which is also a major transformation.

Now I believe our institutional investors understand when you have that kind of growth, that kind of transformation, that kind of movement at that pace that it's virtually impossible to predict, to forecast or project kind of performance.

With new business acquisitions and around 5x the scale entity to lead, guide, direct, manage across 60 different countries, it has definitely been a moving target.

On the forecast for 2019, we did not expect the around $40 million revenue impact from the Chinese government actions on the industry compared to our plan.

China had been growing at 20% a year for the prior 5 years.

It was reasonable to expect the same to continue.

It didn't happen and no one predicted the impact that hit the industry really right at the outset of 2019.

That is our gap versus what we initially envisioned.

Now in full transparency, when you really dig into the numbers, the other gap is in the U.S. retail business, offset by growth in about 75% of our other markets.

We expected more execution from 7-Eleven and Walmart on new distribution, and they did not deliver.

And we expected more from the BWR acquisition, and they did not deliver either.

So that's why we are taking an impairment charge on the U.S. retail brands business.

Let me give you some additional insight on this, too.

We started with some small brands 3 years ago, and we have improved them overall, but now they are no longer strategic so we are just not going to invest any more in them.

In hindsight, we did the same at InBev when I was there.

We started off with some small businesses and brands in Eastern Europe.

And as we grew and better opportunities emerged, we just sold them off to Coors.

Right now, these small brands cost us a lot of money, a lot of cash, and they're just too kind of heavy lifting versus the better opportunities, better, bigger brands and better, more profitable channels we now have in better, more profitable markets.

That's why we put them up for strategic review.

Now we believe there is potential with the much better globally iconic brands we now have like Nestea, Volvic, Evian and Illy, but the others are just too small.

And it is a disciplined approach to focus investment, time, money and effort behind what works and what is scalable.

I'm going to ask our new Chief Operating Officer, David Vanderveen, to talk about those things working and his outlook on the business and some of his major activities.

But first, let me ask Greg to take you through how we finished 2019.

Greg?

Thank you, Brent, and good morning, everyone.

We had a transformative and extremely busy year integrating 2 acquisitions and increasing our scale 5x to $253.7 million in net revenue in 2019 while building the capabilities to manage the business across 4 different channels in 60 countries, some of which were under great pressure right away, like Brent previously mentioned.

With the strategic review of the U.S. retail brands and now with our arms around what works and what doesn't, we expect the business to be less complex and much more manageable going forward.

In 2019, we generated $253.7 million of net revenue versus $52.2 million in the prior year, a growth of 386%.

Gross profit was $152.7 million or 60.2% of net sales for 2019 compared to $9.3 million or 17.8% for 2018, which reflects the significant improvement in product portfolio, penetration of more profitable channels and access to new, more profitable markets.

SG&A in 2019 as a percentage of sales was 6 points higher than 2018 as a result of a number of needed investments to upgrade and build out our platform, including upgrading external auditors to Deloitte, strengthening the quality of our insurance and insurance providers, upgrading legal support to Faegre Drinker and Greenberg Traurig and important investments in the Board of Directors and the leadership team.

Net loss was $89.8 million or $1.16 per share during 2019 compared to a net loss of $12.1 million or $0.26 per share in 2018.

The increase in net loss during 2019 was significantly impacted by the $44.9 million impairment charge for the write-off of goodwill and intangibles taken during the year related to our U.S. retail brands business.

Adjusted EBITDA improved by $1.7 million in 2019 to a loss of $13.4 million from a loss of $15.2 million in the prior year.

Shifting to the balance sheet.

We continue to have a strong base and a clean capital structure.

Cash increased to $60.8 million versus $42.5 million in 2018, an increase of 43%.

Total assets were $251.1 million compared to $158.9 million in liabilities.

At December 31, 2019, we had working capital of $33.5 million.

In the fourth quarter ending December 31, 2019, we had net revenue of $59.2 million compared to $14 million in the prior year quarter, an increase of 323%.

The company delivered gross profit of $32.2 million in the fourth quarter of '19, up 10-fold from the $3.2 million in the fourth quarter of the prior year.

Total operating expenses were $97.7 million in the fourth quarter of 2019, with the largest driver being the $44.9 million of noncash impairment charges for the write-off of goodwill and intangibles taken during the quarter related to our U.S. retail brands business.

As Brent noted, we have decided to look at our strategic alternatives with this portfolio of brands.

The remainder of the increase in operating expenses predominantly reflects the increased scale and talent level of the team we are working with both internally and externally in the business during 2019 as compared to the same period in the prior year.

For the fourth quarter of 2019, we had a net loss of $65.9 million or $0.83 per share, with the majority of the loss being noncash and related to the goodwill and intangible asset impairment.

Adjusted EBITDA for the fourth quarter of 2019 was a loss of $17.4 million versus a loss of $8.7 million in the fourth quarter of the prior year.

It should be noted that the U.S. retail brands only represent 4% of our total revenue for fiscal 2019 but created approximately $18.6 million in adjusted EBITDA loss.

Without the U.S. brands business in 2019, we would have generated $5.2 million of profit EBITDA for the year.

With us now looking at our strategic alternatives related to our U.S. retail brands business, we expect to see significant improvement in our overall profit and cash flow performance once these brands are eliminated from our portfolio.

On the operating side of the business, we had a number of parts of the business that performed well throughout the year.

Our direct store distribution business was up all year long and continues to perform well.

For 2019, the division was up 11%, its 11th consecutive year of growth.

All sectors of this division grew well, including their snacks, alcoholic beverages and the largest unit, nonalcoholic beverages, where a number of new brands were added to the distribution portfolio.

In looking at Noni by NewAge direct selling channel that used to be called Morinda, in our first year of owning this business, we are cautiously optimistic on its trajectory.

Based on the Chinese government industry restrictions that occurred in 2019, we saw our revenue decline in China nearly 40% year-over-year, which was actually much better than some of our competitors in China.

In 2019, Noni by NewAge grew in 38% of the markets in which we operate.

That growth was driven by Latin America, which was up 15% year-over-year, led by Peru with 24% revenue growth in 2019.

Southeast Asia also contributed growth and was up 4%, most notably impacted by Indonesia, the world's fourth most populated nation, which was up 34.8% versus the prior year.

We did not grow in Japan, our largest market.

What we did do was reverse the rate of decline by almost half, which, in and of itself, is a major accomplishment as it is a market that has declined consistently for the last 5 years.

We expect improvements in 2020 based on the impact of some of our new products, such as Noni + CBD and TeMana Shape, and the impact that Dave Vanderveen will have in helping us capitalize in this market in 2020.

I believe we have a strong direct selling and direct store distribution business with several high potential opportunities in front of us, a good balance sheet, a pretty reasonable cash balance and manageable debt.

No one could have predicted the China impact in 2019 or the continued decline in our U.S. retail branded business, but we weathered it and now 2019 is behind us.

As we move forward, we focus on how to do well by doing good.

By doing this, we are dedicated to improving the business, both operationally and financially, which would translate into a stronger growing business and increase value for our shareholders, which we will do by delivering superior products to our customers that truly improve their quality of life.

We have started off 2020 well compared to 2019 despite the current corona pandemic.

The choices we made to invest in marketing and operations and execution overall with the hiring of Julie Garlikov, our new CMO; and David Vanderveen, including building out their teams, are the right ones to leverage this powerful global platform we have built.

We also believe it's the right thing to focus on this part of the business with the highest potential and it's a natural evolution to shutter those things that no longer are strategic.

And with that, I'd like to pass the call over to David, our new Chief Operating Officer, to provide visibility to the major drivers of our performance going forward.

David?

Thank you, Greg.

Before I talk about the New Age omnichannel platform and what we're doing with it, maybe I should answer a question that a lot of people have been asking recently.

Why did I leave XS and Amway to join New Age?

Why leave the largest business in direct selling for a much smaller player with perceived challenges and risks?

Why take such a big bet with my career?

Obviously, I didn't need this.

I had a very successful gig going with Amway, the leader in direct selling who bought my XS business, which is now in 60 countries with roughly $500 million in annual revenue.

So why join New Age?

I think the answer there is because I don't sit still very well, and the world of consumer goods is going through radical transformation right now.

The big fish doesn't always eat the small fish anymore.

Now the fast fish eats the slow fish.

Many New Age business investors know that I'm an investor and adviser at RX3 Ventures together with Byron Roth, Nate Raabe, Aaron Rodgers and Glenn Rogers, who was formerly on my Board at XS and has since now joined New Age as the new Head of Business Development.

We adopted a world view that traditional retail is broken.

I mean yes, you have to be there, but it doesn't and can't be your only focus to succeed.

We know that healthy consumer brands, particularly in the emerging and growth categories, need to be heavily focused on direct-to-consumer growth across alternative channels like social and e-commerce, flagship experiences in store, catalog and even direct selling.

The point is that consumers need to be able to buy brands and products from a growing number of points of presence when they want it and where they want it.

Much of my thinking in deciding what I wanted to do next was to find the right people, and people are always the most important, at a place where we could move fast and had resources to execute, where we were committed to organic and sustained growth, and we could explore serious omnichannel growth strategies and execution.

New Age has already done the heavy lifting of building the platform and getting scale in a very, very short period of time.

So I think now it's time to leverage that platform and drive it like we mean it.

And in my case, drive it like I stole it.

That's what I have a history of doing.

I like to drink life with 2 straws.

I like to move fast.

The team always gets the credit, and I love to win with the team that delivers dramatic value for shareholders.

Bill McDonough from Cradle to Cradle, which is one of the best environmental design firms on Earth, did a talk for a group I'm a part of in Laguna Beach.

He was talking about applied values.

He said design signals intent.

I take that to mean, what we build matters.

And how we integrate our values into the design of our business, our brands, our products and how we operate is what creates movements.

It's also what we leave behind.

Some brands and businesses can help people transform their lives, and we want to do that at New Age.

The team stands for educating and inspiring the planet to live healthy.

We do that with more than 280,000 people in our extended system worldwide, and we're constantly integrating those values into our daily decisions.

I'm very proud to be a part of that.

With the current health crisis and consumer demand for healthier products that they can consume in food, beverage and supplementation, there's kind of no better time to be in our categories, connected directly to consumers' homes around the world.

It's hard to think of a better business to be leading growth in right now.

Some industries just picked up an unexpected gale force set of headwinds that will really be difficult to manage.

And I feel deep empathy for friends in services or leisure or transportation industry.

The company and our strategic purpose is proving itself to be the right place at the right time over and over.

Look, New Age has challenges.

I knew that going in.

However, I believe that the company has taken the right steps to focus on the best parts of the business and to eliminate the small parts we don't need anymore.

That level of discipline and courage is not always easy to find.

This company moved fast to acquire businesses and brands that allow them to scale, grow and sustain themselves.

Their speed and the level of execution as a team was what appealed to me most.

And we're continuing to pivot and operate in a business that operates at a very high rate of speed, almost like a high-speed sport.

We've made significant progress in a very short period of time.

The original businesses that we acquired were done to survive and to build something that was viable today.

All of the acquisitions were of declining businesses.

They were purchased at significant discounts because that's what New Age could afford at the time.

Morinda was no different.

It had declined for 10 years, was purchased for less than 5x EBITDA.

And now it's just starting to rebound.

Now we have something of real value.

We have a global platform.

We have the infrastructure, the people, the capabilities, healthy brands.

We have direct-to-consumer e-commerce and home delivery.

After 12 months, we now have the direct selling side of the business going in the right direction, and we are offloading elements that aren't strategic anymore given our path forward.

One potentially might not like or better said, understand the current business overhead, the current SG&A and related levels of profitability yet.

This is just a point-in-time assessment, a data point.

And it's simply reflective of the fact that the platform has just been created.

Regardless, I agree with the need for SG&A leverage and faster profitability.

But let's be clear, we aren't focused on day trading the stock.

And we realize that the trajectory of real and sustained growth isn't a straight line up into the right.

It's a journey like climbing any mountain that has a series of peaks and valleys.

Keeping the end in mind, constantly adjusting and staying focused, we will continue to reach new pinnacles of growth and success.

So let's talk about what we're doing right now to accelerate our path.

We're launching hot new products.

We just started with CBD + Noni in Japan, where I recently spent 2 weeks working with key distributors and our sales and marketing staff.

And we sold out of what we expect would be 2 months of inventory in a week.

It was an explosive launch and we were out of stock for a short period of time.

We created great scarcity.

Japan is much bigger than just the impact of launching a couple of new products.

Our distributor leaders there are now more excited than ever to see such a dramatic change in direction and a new portfolio of products they can sell via new platforms, particularly social commerce, mobile apps and experiences and events that attract a new generation.

In this industry, in direct selling, when your senior leaders are engaged, motivated, focused and excited about the business, it creates fresh wind in your sails and you can run downwind.

So what are the big opportunities emerging in Japan?

I think it's important to understand how the market works.

It's not like the United States.

And breaking through the legal barrier in Japan to be able to just sell CBD beverages was the first big hurdle.

But it's also a little bit too edgy for the Japanese social norms and customs, what they call their wa, their social norms.

They have a much smaller body of codified law in Japan than we do, but their social norms and standards control their actions and behaviors much more than other places.

So we have to break through that, too.

We have to break through those social customs.

And then the great thing is, first movers in Japan who do that successfully, you tend to endure in that pole position.

So first, we broke through with our direct selling business and that channel distribution, and that has gotten attention.

Now we're partnering with the most revered stem cell medical clinic network in Japan using CBD for post-op recovery, but we're also breaking through on television with QVC, which will help with major retail distributors.

Some of the largest retailers in Japan are asking to partner with us on CBD because they want to be part of that fast-moving trend, but they don't want to be the first.

We are legally and socially first in Japan, and we will continue to lead from there.

We are in a really historic position that we will leverage.

Beyond Japan, we're excited about the prospects for TeMana Shape, our new intermittent fasting product that we plan to launch in 15 markets over the next 15 to 45 days.

Intermittent fasting is one of the hottest health and weight loss trends right now, and we have smoothie pouches that are made with Noni and Kombucha that taste great.

And on average, our test subjects are losing 15 pounds in a month.

We just sold out of Shape in North America last week on our first day of launch.

Also Julie Garlikov, our CMO, and I are bringing in a new e-commerce strategy and social selling tools and software to powerfully enable our field to make execution easier on them.

We're transforming and improving our e-tail, e-commerce and affiliate efforts by orders of magnitude.

To that end, I encourage all of our investors to go to our new website, which just launched today, for our direct selling side of the business.

It's at www.noninewage.com.

That's N-O-N-I-N-E-W-A-G-E.com.

It's not our corporate site.

It's not the corporate New Age site, which is also updating.

But this one, noninewage.com, is brand new as of this morning, like I said, and we'll encourage you to test the elegant and improved checkout.

If you type in the word immunity at checkout, you get a 20% discount, a special offer.

And if you're just interested in Tahitian Noni Juice, I'd be happy to send any listener on the call today a free bottle, just send me an e-mail, david_vanderveen@newage.com.

The last driver I want to talk about today is immunity, and it has a bigger potential value for us than all the other things we're working on combined.

We're carefully helping people understand and improve their immunity in general, but also with a host of new incentives to try some of the products that can uniquely help their bodies stay healthy right now.

We love the fact that all of our products are healthy.

But 2 of them have been shown in human trials to increase people's immunity and do that significantly.

That's right, proven.

They've been proven to strengthen people's immunity.

Tahitian Noni Juice or TNJ and Cell Defense are 2 of our products that are researched, patented, tested, trial proven and published to strengthen people's immunity systems, in some cases, by more than 30%.

The Polynesians have been using Tahitian Noni Juice as traditional medicine for centuries.

A number of scientific studies have recently been published about TNJ, particularly over the past decades through Morinda research partnership, showing the boosting of bodily functions like NK cells, which are kind of the ammunition to kill viruses by as much as 32% in healthy adults.

We've donated it to 9 different hospitals in China.

We are offering free trials to new consumers with incentives for our distributors to share it to boost immunity.

And you can find a link to the science and studies on our new website at www.noninewage.com.

The other product in our system that boosts immunity is called NHANCED Cell Defense.

It too is researched, patented, tested, trial proven and published to strengthen people's immune systems.

And it was developed in conjunction with the U.S. government.

It's not a cure, it's not a vaccine, but it's a powerful product that helps to boost people's immunity right now.

Cell Defense is a way for people to take action right now and have more control of their health to better protect themselves beyond just washing their hands and more often, even self-sequestering.

We've given it away to all of our employees and are working to make more, frankly, as much as we can, as fast as we can.

I didn't know about all of this when I joined New Age at the beginning of the year.

I also didn't know that we'd be hit with this global business disruption and that one of the most challenging health crises of our time would be hitting us right now.

What I do know now is that New Age has 2 products that can help people immediately, and I'm making it my personal mission to get the word out globally.

I understand that our situation at New Age, the challenges and opportunities, and I knew those things going in would be difficult.

I understood and understand investors' desire for faster financial progress and profitability.

I want it, too.

China was out of everyone's control in 2019.

And now I believe we're in a good position to outperform competitors.

And what matters most is that we have an outstanding platform, that I have a tremendous experience leveraging platforms like this.

And after my first 60 days, we're already starting to see results.

What we have and what I see and why I'm here is an industry, a sector whose time is right.

With a powerful range of healthy products, we're exploding out of the gates with some unique patent products that can really help people now.

I'm asking all of you to join Brent, Greg, our Board, the rest of New Age management team and me to enlist your friends, connections and followers to be a part of making a difference for this planet with these healthy products, but more importantly, for your communities and families, for yourself right now.

We can do it and we humbly request your help in doing so.

And I invite you to join me as part of the team.

Brent?

Wow, thanks, Dave.

I hope all of our investors can see why Dave Vanderveen is probably the most respected leader in the direct selling industry.

I think we're incredibly fortunate to have him, and let me tell you, equally lucky to have Julie Garlikov, our new CMO, who is just as capable.

75% of our management team is new in the past 15 months, so we're just coming together.

Dave talked about some of the strategic and operational projects we are undertaking and he is leading, and I would like to just frame what Dave is leading and put those actions in context.

Strategically, we are focused on 3 primary regions: North America, Japan and China.

Within those geographies, we're building out 3 platforms: health and wellness, healthy appearance and nutritional performance, and we're working to build $100 million brands within each one of those platforms.

Tahitian Noni is already one and TeMana is on its way in the healthy appearance platform.

We will continue to differentiate our brands with healthy functional points of difference, utilizing Noni across the board, plant-based ingredients, CBD and phytonutrients from our health sciences patents.

And in terms of consumer benefits, we're focusing on immunity protection and reduced inflammation, where we have the science, the proof, the patents, the studies, the human trials to expand our relevance with consumers.

Look, we have grown truly over 100x in the past 3-plus years, following a road map that we laid out at the very beginning of our journey.

Our road map for the next 3 years has the same mission.

Greg talked about it, doing well by doing good.

But getting there looks much more focused and much more precise in how and where and what and when we execute to get there.

But we are absolutely confident we will get there and in the process drive tremendous return for our shareholders.

Getting that incremental scale is technically financially very important to us as all the new revenue from this point forward has significantly less SG&A attached to it.

So roughly 40% of the gross margin can flow directly to net income.

Operationally, I'm very pleased with our fast start to the year, especially in the context of the global business disruption.

Being up in Japan, our largest market, is not an accident.

The TeMana launch in Japan (sic) [China] was our first new product launch there in 10 years, and we are working rapidly to expand our business in other channels there and not just through Tmall and WeChat.

Noni + CBD is another excellent start, and TeMana Shape, our intermittent fasting, single-serve smoothies is launching now, and it's just the first quarter, much more to come.

In our third focus market, North America, as one might expect, our DSD Division has again started off strong, and we continue to add new consumer must-have brands in their 3 product sectors.

But positively also we have gained some important new distribution on Nestea in certain Costco regions and with Walmart nationally.

Like everyone else, we're selling all the water we can produce and distribute in the short term.

But as previously mentioned, we are only going to focus on the products with the most potential in that division with a clear ability to profitably scale.

I do expect some short-term business disruption and difficulties to operate.

It's just impossible to predict how and where it might impact us.

Our biggest market is up, and we have a tremendous pipeline of activities and products that we are implementing in Japan and frankly, around the world.

And Dave and Julie and their teams have had immediate impact and expect that to continue.

As Dave and Greg mentioned, we have this e-commerce and online ordered direct delivered to your home business that structurally is pretty fortuitous right now.

Through that, we are delivering healthy products that everyone needs, and I expect you'll see a lot on strengthening immunity and how our Tahitian Noni and NHANCED Cell Defense products directly help -- and will help consumers, and you'll see more information on that from us coming over the next quarters.

We are being very careful with it because even though we have the products that work, we will not be opportunistic.

And frankly, we just want to provide solutions as good citizens at a time when it's needed the most.

And with that, I think I'll pass it back to the operator and open it up to questions.

(Operator Instructions) Our first question comes from David Bain of ROTH Capital.

Very helpful color.

You hit a lot of my questions in advance of the Q&A.

But if I could on guidance first, I understand with the significant kind of unforeseen disruption in China in the first half with the cooling impact from the industry view and then the 70th anniversary in the fourth quarter, but given your stated 1Q growth worldwide and just based on what you see today with the news, with the virus, with the current trends and the strategies that you guys outlined, is it fair to say that you think you're going to see overall organic growth this year?

I would say, Dave, it's Brent here.

Thanks for the question.

I would say that we are comfortable right now with the full year consensus guidance in both the top and bottom lines.

But as you pointed out, this is a very fluid situation and I'm not sure of all of the business impacts.

But the fact that we started off the year with growth overall and growth in our largest market is a very good start.

I don't think many people can say that.

So we're comfortable on a full year basis.

I do think that there'll be some fluctuations on a quarter-to-quarter basis.

But full year, we're comfortable with the consensus estimates that are out there.

And with all of the new products that we're doing, with the new people, and like Dave talked about, the leverage of this platform we've created, we're set up for a good year, but it depends on the global level of business disruption that's just impossible to predict.

Sure.

Okay.

So that was helpful as well.

And then can you discuss overall IPC growth or revenue per IPC maybe last year in the fourth quarter.

Dave, you mentioned multiple products and programs that you've implemented to kind of grow both.

Can you give us any data points on reception at this point or is it just too early?

And then can I just make this a multipronged final question?

I know you touched on this, Brent and Dave, but to be clear, do you think in some ways direct selling is becoming a more popular way to sell products in the current environment given it's like one-on-one, no gatherings, especially now you're anchored by immunity products.

And then finally, virus mitigating techniques for IPCs, such as Skype, telephonic sales or anything to think about there.

I know that was a lot.

No, that's a good question.

Brent, do you want me to answer some of that or you want to take that?

Yes.

You got it all because it's three-pronged and a very difficult question.

I hope I'll catch it all.

Again, it's a great question and I think it's something that we're right in the middle of.

So I'll give you a couple of examples.

I've been kind of focused on market by market, not as much in aggregate, but we are seeing significant growth and not just in per IPC, but more importantly, we're seeing a lot of our senior leaders who had kind of become disengaged in some markets because, like Brent had talked about, Morinda had been a declining business, which is not good in direct selling.

You really need to maintain growth to keep everyone excited and participating.

We're seeing a lot of senior leadership re-engage in big ways and really kind of recommit and come back and put a lot of effort in, particularly in our biggest markets, in China, Japan and then our North American market.

One of the better numbers I saw in China was that, they were hit by the coronavirus early.

And our Q1 numbers, we were seeing, particularly in February where they were in quarantine, we were seeing almost the same number of new distributors coming into our business as previous year, which is a testament, I think, to your second question which is, is direct selling becoming more relevant.

The Chinese government did the entire industry a big disservice by putting 100 days moratorium on the business rather than just calling out bad actors.

They had problems in the market where some Chinese companies were overpromising in ways that were very damaging to consumers, particularly some young children, where there were cancer claims and they pulled people off chemo to give them supplements rather than actual medicine and it had negative impacts on some of those people.

And so the government cracked down on the whole industry.

We weren't one of those bad actors, but we were all impacted by it.

And now we're coming out of that.

But I think what we're seeing is that when people are at home and when people can't travel and people can't really go to their offices and work, they're finding alternative ways to benefit.

And traditionally, when there's a big downturn in the economy, healthy direct sellers do really well.

It's a time when people are looking for other opportunities and they're willing to do things maybe they didn't want to do if they were living in healthier economic times.

So that's all really healthy.

As we saw in our Japanese business, we sold out of a hot new product category.

After our key monthly sales day, we have a lot of subscribers that go out on the 15th.

So we just saw a big bump in incremental revenue in Japan because of some of that hot new engagement, because of the peer-to-peer communication that occurs.

And I think if you look at, to your last question, and Japan's had a down economy for 20 years, but if you build that into your last question about new technology, what we've been implementing since Julie Garlikov came on and myself are a number of new technologies.

She just revamped our entire website.

We're in the middle of deploying a mobile app called Skylab that it really helps take people on a journey and automates and gamifies the process of either a customer journey, an affiliate journey or one of our distributor journeys so that they kind of know what to do day by day.

It recognizes and rewards them and gives them badges and ranking so that they're encouraged to change behaviors and add new habits to their life.

We're implementing and we have implemented Zoom meetings in the past, and we're scaling that much more aggressively.

One of the things we're doing right now is we're actually having more meetings than we used to have because we have a focus now on doing it virtually.

And that's having, we believe, an impact on our business and creating some scarcity on our immunity products, which we're ramping up production to continue to fulfill through what's obviously a difficult time.

And we're also working to get the story out about the benefits of our products, particularly around immunity, in a way that we're being very careful about not being opportunistic.

We're not overpromising, but giving people a lot of value around immunity right now, all the different things you can be doing.

And the way that a couple of our products can really help people hopefully stay healthy during what's proving to be a difficult health crisis right now.

And our next question comes from Aaron Grey of Alliance Global Partners.

And David, welcome to the team.

So Brent, just an initial question on the impairment and the shift away from brands certainly makes sense just given it looks like the New Age segment had, had negative gross profit dollars the past couple of quarters.

But just, first of all, as we think about the DSD business, are there any synergies that will potentially be lost or impacted as you kind of move away from the brands business?

And then also just in terms of potentially selling off some of those brand names, certainly, there are some with some brand equity in them such as Coco-Libre.

Are there some ways you're looking to potentially monetize those or any expectations there?

Great question, Aaron.

I'm going to ask Greg to help me on it, too.

First off, on the synergy side, on the DSD side of the business, I mean the biggest potential negative synergy might be in Xing from a revenue standpoint.

But again, it wouldn't be a negative synergy from a profit standpoint and probably be good.

And what's happened, again, I mean I hate to keep bringing up China with what they did on the industry in China in 2019, kind of their global gift to the world in 2020, but the whole tariff situation significantly increased the cost of raw and packaging materials in 2019 that basically significantly impacted glass and aluminum and negatively impacted the profit of these brands.

So they weren't always negative, but now they're just a drag on us versus the other opportunities we have.

So there may be a little bit of negative revenue synergy, but not negative profit impact as it relates to the DSD Division.

And I would say, overall, look, you've got about 80 brands in that group and about 700, 800 different SKUs.

And they're up 11%.

I don't know many direct store distribution businesses that in 2019 were up 11% and they're continuing to just crush it, right?

So there's a lot of expansion potential for that.

In terms of divesting those businesses, you're right, Aaron, there is value in them because they've got distribution, they've got sales, they've got revenue and just in the right hands of people that can focus on them and want to focus on them of a smaller portfolio, it may make sense for them.

So there may be some value there, but it's all upside from this point given how we've treated it financially.

So we'll see what happens.

We've already started the process literally more than 30 days ago or a month ago.

So we're progressing that.

Anything else, Greg, you want to say?

Yes.

A big thing I'd really throw in there.

We still see that retail brands can be a key part of our business and really a key part of the business moving forward.

The problem is that in the retail market, you need to have brands that are very well known and brands that are very large.

And then we really see that we need to put them across both retail as well as e-tail and then even going out and getting halo brands and putting them through our direct-to-consumer model.

So then by doing that altogether, you really do get a omnichannel market, and that's where we really see the growth coming.

But basically, you need to do that with very well known, very iconic brands, which now we think we have with more of the Nesteas and Volvics of the world compared to some of our older, smaller brands that we had originally bought.

So basically just like Brent said, during the short term...

That's our position, right?

Yes.

And basically, during the short term, we might see a minor downtick in revenue.

But basically, we think we'd see a very large uptick in profitability.

And the process of selling off some of these smaller brands, I think they make a lot of sense in the hands of a much smaller, entrepreneurial type of company.

And using the same way we did originally as something to get a base and really get moving.

But basically now where we sit today, I mean we're a $0.25 billion company in 60 different countries, and it's just time for us to take that next step.

And it's better for the company and our shareholders if we focus on some more high potential brands and more high potential selling with our direct-to-consumer.

So that's where we're moving now.

I think Greg said it perfectly and beautifully.

I couldn't have said it better myself.

And I would just reiterate, we like the retail sector.

We like traditional retail sector, but just not with the older, smaller brands that we started with.

So when we look at the company, we want omnichannel going forward and want to compete in each one of the channels.

You just have to do it in the right way with the right scale and particularly in traditional retail.

Even if you look at some of the best brands, like over the past 10 years, like Bai, it took them 9 years to get to just over $100 million, and they were sold with a $400 million loss carryforward.

So you need to have access to retail, but we want to do it in the right profitable way.

And there's just, as Dave Vanderveen talked about, just better and more profitable, more channels and markets that we now have access to and it makes sense for us to double down on those, especially with what's going on in the global economy.

But we like traditional retail, but in the right balance, I would say.

All right.

Great.

That's really helpful.

And then just diving a little bit deeper just into quarter-to-date, certainly appreciate not wanting to give specific guidance on 2020 just given all the uncertainty.

But you mentioned before, you're up year-to-date so far.

So just are there any type of goalposts you can provide in terms of where you expect revenues to come in for the first quarter.

I think you did $58 million last year.

So fair to think slightly above that.

How best to think about that?

And then any specific color that you can provide in terms of specific countries, such as China and Japan.

I think Japan, you implied that it's also up year-to-date and where you expect those to end the quarter?

Yes.

This is Greg.

And basically, we can say on this call since we meet all Reg FD that so far what we've seen in the first quarter is that throughout the first 2 months in revenue, we are just very slightly above where we were last year.

But with March, we still continue to see good things.

But basically, it's difficult because seems like each day when I come into work, I'm seeing less and less traffic.

Yes.

And so where we sit today is that through February, we are slightly up compared to last year.

And basically, we are very cautious about March, but we feel like we are definitely in the right market delivering healthy products directly to the consumer's home, so that we feel like we are a very good alternative for a lot of customers out there to really help build their immune system and really live a healthier and better life.

I want to add to that.

I think that's right.

We're up and we expect to be up versus prior year in Q1.

The bigger picture for me, though, is the full year basis.

Look, Dave Vanderveen and Julie are just starting to hit their stride.

The launch of Noni + CBD in Japan, the TeMana skin care launch in China, the TeMana Shape intermittent fasting product that we're launching and some other really powerful things in the queue, we think, are really going to drive the business, coupled with new leaders joining the business, plus the economic situation that it could have a positive impact on our network.

So that's why we said on a full year basis, we're confident in both top and bottom line, but we'll have some differences on a quarter-to-quarter basis.

And that's just too hard to predict.

But look, we've got the platform and we've really got the right people and the leadership team that knows how to drive these things.

Julie, I mean was at Rodan + Fields as one of the key marketing leaders there.

And Dave is just a machine.

So he knows exactly what to do, when to do and how to do.

And the excitement in our company, even with what's going on in the world, is palpable.

And I wish I could share that with all of our investors, but I feel lucky to be in this position with the channels and the e-commerce and everything that we've got.

And Dave, I want to ask you if you wouldn't mind piling on, on kind of what you see from a growth standpoint for the company?

Thanks, Brent.

Yes, I mean the opportunity right now is to add a lot of value to communities concerned about their health and to attract people who are worried about their finances.

And there just isn't -- it's not what we wish for, but it's the reality that we have.

And so this is a time when the direct selling segment of our business can really run.

And fortunately, we've been working pretty aggressively since I came in, in January and Julie before that to dramatically overhaul the e-commerce part of the business and also get some of these new tools, like our mobile app, which will really help gamify the business for people coming in remotely, in particular.

A lot of tools we're using like Zoom and WeChat and different social tools for communication just makes it easier for us to execute that and for our distributors who are older to get in that as well.

I brought some relationships with me and one of them, we have a great new social media team that's just overhauled all of our social platforms and is doing training now with a lot of our older leaders to help them quickly build the skills to be successful on some of those newer social selling platforms that people need to know.

And we're just seeing great results.

There's a lot of excitement, a lot of activity.

I was surprised to see China do that well this February versus previous year given the impact of the coronavirus on that market.

And they were right in the middle of, particularly Hubei and Wuhan, they were right in the middle of a lot of the big issues in February with quarantines.

And we continue to see good things happening there.

So it's going to be a bit of an ugly girl dance, but I think we're going to be the least ugly girl in some of these global pandemics right now.

And I think we'll look relatively positive given that.

That was really helpful.

And then just one last one, if I could.

Just as I think about the path to profitability, when we look at the fourth quarter, it looks like SG&A ticked up sequentially by about 30% or just under $8 million.

Also gross margin came down like over 300 basis points.

And I think even if you exclude the impact from brands, that New Age business is still down just from Morinda.

And that all kind of led into the negative EBITDA that kind of worsened sequentially.

But sounds like you're going to get back towards that path to profitability as you kind of shelve off the brands business, which should certainly help.

But how best overall to think about the SG&A, which look to tick up and gross margin returning to enhancement.

And as we kind of get there, is there any type of time line you guys are kind of aiming towards for when you get to breakeven or any kind of color there would be helpful.

Go ahead, Greg.

Yes.

This is Greg.

So basically, during the fourth quarter, when we took the impairments, we also had to really look at some of our inventory we had in those channels.

So then we did take a little bit of an extra hit there.

When we look at the company going forward, we think that we should have gross profit somewhere closer to the mid-60s.

And that's something we think we can maintain.

This year, it did come down based upon some of the write-off we had, but we think we have those behind us now.

And then once you look at the SG&A, we did take a fairly conservative look at it here as of 12/31, which basically had some effect on.

But a big thing about our current SG&A, we have built the company now so that we can scale and scale significantly probably even to 3 or 4x the size we are today without having to make a lot of additional SG&A additions.

We feel like we have a very good team on board that we can continue to add in a couple more people.

But basically, there's not going to be a lot of extra cost going through that even as we fully scale to a much bigger size.

So overall, we'd hope that not sometime within the not too far out future we could get our SG&A down to the low to mid-30% range.

And I'm just going to add to what Greg said.

So if you think about a 65% gross margin, commissions, which, for this kind of business, is really fairly fixed at 29% to 30%.

And then SG&A, the more we drive that number down, that's where the real leverage is.

So he is exactly right in terms of the P&L structure.

And the closer we push that down to 30%, the more free cash flow we generate.

So that's why scale is so important in all CPG businesses, but we're now at that point where the cases that you add from this point forward and the revenue you add from this point forward is the golden revenue, golden cases because a significantly greater portion of the gross margin drops to the bottom line because you don't need incremental SG&A.

Commissions stay the same at 30% -- 29% to 30%.

But our goal would be to get that SG&A down to the low 30s percent of the net sales because then you can see how the cash really drives the business.

And our next question comes from Mike Grondahl of Northland Securities.

Could you guys talk about specifically which brands you're exiting and which ones are going to stay?

Mike, it's Brent here.

We're looking at it now.

But for sure, Coco-Libre, Aspen Pure, including its manufacturing businesses, and potentially depending on the price we get for them and the interest some of the other traditional retail brands that we started with.

That being said, we like some of the globally iconic brands, Nestea, Illy Coffee.

Coca-Cola had these brands and they had scale in them.

So we think that they're quite scalable and good brands as is Volvic and Evian.

But all other brands, aside from those globally iconic brands, we're open to divesting so we could focus on the big winners and continue to look for other big scale winners in that sector.

So again, we like retail but in the right context.

But any and all of those other smaller brands that we started with, but for sure, Coco-Libre, given what's happened with the coconut water segment overall, Aspen Pure and potentially some of the other brands, too, but for sure those 2.

Got it.

So the only 3 that are core going forward are Evian, Illy and Volvic.

Did I hear that right?

And Nestea.

And Nestea.

Okay.

What about the Marley brand?

Potentially Búcha and Marley, we'll see, but they really need to be scalable.

And outside the United States, especially in Japan, there's a lot of interest in Marley and relevance, especially with the Marley+

CBD.

But as everybody knows, we've been curtailed from doing that in North America, where we felt we had the biggest potential.

We're open, but there's a few for sure that we're going to divest, but you got to be disciplined in this stuff too because, as Greg said, overall, it's like 4% of our revenue and we want the profit.

We want the cash because it's the right disciplined thing to invest that profit, invest that cash in what's going to double and triple the size and scale of the business.

Got it.

And you said earlier, Brent, 7-Eleven and Walmart did not deliver.

Why do you think those channels didn't work?

I think it's a combination of them and us, right?

So with 7-Eleven, we launched Búcha and that channel and that particular customer really just wasn't ready for a Kombucha kind of product.

We had initially seen great movement for Búcha in 7-Elevens and in convenience stores around college campuses up in Canada.

But when they brought it to the United States, 7-Eleven is fairly challenged because more than half of their outlets are franchised.

And just because 7-Eleven puts it in the global planogram doesn't mean any of their franchisees put it there.

So we didn't get any of the distribution.

We got very negligible parts of the distribution.

And then to get the distribution, you got to pay more money with the FAOCs and more money to do merchandising on a store-by-store basis.

And it just becomes really unprofitable if they can't just get the product and get it on the shelves in the right way, which 7-Eleven wasn't able to do.

And if you've got a team of less than 30 salespeople, even if you go get merchandisers and those kinds of things, it just becomes too expensive.

So that's kind of 7-Eleven.

And same with Walmart, we didn't get all of the retail distribution we're looking for and there's always a big lag between authorization and distribution, right, getting it into the stores.

But a couple of SKUs of Marley Mate in a couple of the key clusters is not enough to have presence.

And technically presence is what correlates to preference or kind of daily drinkers and real consistent sales when it gets part of consumers repertoire.

You just didn't get enough preference.

So there's still potential for Mate.

That's a real winner within that whole portfolio, but those guys didn't execute.

And when you get Nestea, for example, in like Costco and Walmart, that's really the right kind of consistent product because consumers are used to buying those kinds of products in those kinds of channels.

So Nestea, we think, is a much better opportunity there than some of the old New Age kind of emerging brands just trying to break through in what is, frankly, a huge sea of confusion in traditional retail right now.

Got it.

And just one more.

It looks like a filing came out a half an hour or 45 minutes ago.

And I don't know if it's related to the ATM or not or an update because I haven't read it in great detail, but it does look like a new credit facility requires you to maintain roughly $15 million of cash and it talks about $15 million of new equity needed to be raised by June and then maybe $30 million by year-end.

Could you guys just kind of explain that at a high level what's going on there?

Yes.

Basically, it's our same line of credit and term loan we have with East West Bank.

We just went out and reset some of our covenants for 2020 and '21.

And basically with that, we have the cash in both China as well as here and basically until once we hit certain EBITDA covenants, we need to keep it as restricted cash with them.

The majority of it is in China compared to here so that we have more access to it and can use it within the U.S. where we can see faster growth, we think.

So that's just part of that same East West loan.

And then with that, as an equity cure to EBITDA...

If we need it.

Yes.

And then as an equity cure to EBITDA, we would raise $15 million before June 30, of which we've already raised $6 million in January.

So then we'd have another $9 million to go at some point here within the next 4, 5 months.

And that's if we need it, Mike, versus just driving the performance of the business, which is our primary focus.

And so far so good on the performance of the business, and we expect more of that to continue.

So if we don't have to do it, if we don't have to raise any equity, we don't want to.

Okay.

And the $30 million in total by year-end, that's what, only if your EBITDA comes up short.

Is that what you're saying?

Yes.

Basically, the way it works is that, well, we've consistently raised cash throughout the last 4, 5 years.

So then I would guarantee you our -- I wouldn't say guarantee, but basically, there's a very high likelihood that at some point during this year, we will go out and raise some additional capital, especially when we continue to look at different opportunities as we move forward.

So basically, that falls in line with where we're at.

And basically, it made sense for us to make these adjustments to our loan at this point.

And this is just a exhibit to the 10-K so.

That's what it was.

Okay.

Thanks, Mike.

I think we're a little bit out of time, everybody, but I wanted to thank everybody for joining us on the call today.

And we appreciate your alignment to the vision of what we're doing at the company.

I do think we're in a good position with our e-commerce and our home delivery and the strain on global economic situations that could spur more people coming into our system and participating and looking for additional sources of revenue.

And we like the portfolio that we're in with these healthy products.

So thank you again for joining us and we look forward to continued conversations.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.