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Edited Transcript of JSDA earnings conference call or presentation 3-Aug-17 8:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Jones Soda Co Earnings Call

SEATTLE Aug 11, 2017 (Thomson StreetEvents) -- Edited Transcript of Jones Soda Co earnings conference call or presentation Thursday, August 3, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer L. Cue

Jones Soda Co. - CEO, President and Director

* Max Schroedl

Jones Soda Co. - CFO

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Conference Call Participants

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* Galileo Russell

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Presentation

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Operator [1]

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Good day, and Welcome to the Jones Soda Co. Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At the time, I would like to turn the conference over to Max Schroedl, Chief Financial Officer. Please go ahead, sir.

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Max Schroedl, Jones Soda Co. - CFO [2]

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Thank you, and good afternoon, ladies and gentlemen. Before we begin, let me remind everyone of the company's safe harbor disclaimer.

Certain portions of our comments today will concern future expectations, plans and prospects of the company that constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements containing verbs, such as aims, anticipates, estimates, expects, believes, intends, plans, predicts, will, may, continue, projects or targets and negatives of these words and similar words or expressions.

Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. Factors that could affect our actual results include, among others, those that are discussed under the heading Risk Factors in our most recently filed reports with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q and current reports on Form 8-K.

Listeners are cautioned not to place undue reliance upon these forward-looking statements that speak only as to the date of this earnings call. Except as required by law, we do not assume any obligation to update the forward-looking statements that we make today.

I will now turn the call over to Jennifer Cue, Chief Executive Officer of Jones Soda.

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Jennifer L. Cue, Jones Soda Co. - CEO, President and Director [3]

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Thank you, Max, and good afternoon, everyone, and thank you for joining us.

During our second quarter 2017, we had some exciting movement forward on our growth and higher-margin initiatives, such as Lemoncocco and Fountain, while also dealing with the delisting of our Jones 12-ounce can business at a national retailer. Revenues were down 9% due to a combination of the delisting as well as some softness in our glass bottle business regionally, all offset by a small price increase we put into place in the second quarter on Jones Soda glass bottles. In addition, the growth of Lemoncocco, Fountain as well as our 7-Eleven partnership assisted in offsetting some of the revenue decline.

Competition for shelf space in the craft soda set has intensified with familiar and new entrants into the segment. Craft is a growth area in the declining CSD category. We are original and authentic craft, and believe our 21-year brand has a prominent role to play as the category continues to grow.

Our gross profit margin in the second quarter improved due to the increasing percent of sales of our new higher-margin initiatives as well as a price increase on Jones glass bottles. Our Jones 12-ounce can business has a much lower margin than glass bottle. So the loss of the business while impacting our sales levels will work in our favor in the long run in terms of the gross margin. We are currently evaluating retailers and potentially utilizing e-commerce for our Jones 12-ounce cans, if the margins makes sense.

As mentioned in the second quarter, we made some good headway with our new brand Lemoncocco as well as Fountain, and I am excited to announce several new retail listings and accounts landed for these initiatives after Max goes through the numbers in more detail. Overall, I'm pleased with the continued evolution of our total portfolio and know that we are on track to building a diversified portfolio of craft beverages.

Jones in glass bottles are being set up for success in the emerging craft soda industry as we continue to emphasize our classic flavors in conjunction with the emerging trend of craft over mainstream sodas. Just this month, we are launching of a Jones Cane Sugar cola in glass bottles across all Kroger divisions nationally. Kroger grocery has created a solid specialty soda set. And Jones in singles format with an array of up to now 6 flavors is continuing to show double-digit growth of this chain. Our challenge and opportunity is to emphasize our strong classic flavors as well as our single-serve format to all retailers across the country to ensure we can see the same level of success with our Jones glass bottles as we currently see at Kroger.

Spiked Jones, as announced this past May, just rolled off the production line in late July, and we are excited to officially kick off this new innovation in August with Columbia Distributing in the Pacific Northwest. This first-ever hard cider-soda tastes fantastic. It's less sweet with 6% ABV, and I think it's going to be a real winner. We have interest in this new innovation from all over, and we will be evaluating the possibility of offering Spiked Jones to select retailers outside of home market as it makes sense.

I will now let Max go over the numbers and return with some more detail on our growth initiatives and plans for the balance of the year.

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Max Schroedl, Jones Soda Co. - CFO [4]

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Thanks, Jennifer. Revenue in the second quarter of 2017 was down 8.6% to $3.9 million compared to $4.3 million in Q2 '16. The decline in revenue was attributable to increased competition in the craft soda segment at grocery and focused by retailers on allocating shelf space to their own private label offerings. During the second quarter, a major reseller delisted our 12-ounce can in favor of a private label product.

During the quarter, 25% of our total revenues were generated from Canada sales. Promotional allowances decreased $37,000 or 8.1% to $421,000 for the quarter, due primarily to timing differences in the 2016 comparable period. As a reminder, the accounting impact of these promotional allowances is a direct offset to gross revenues.

Gross profit margin in the second quarter of 2017 increased to 27% from 25.2% in Q2 '16, primarily due to a price increase implemented late in the first quarter of 2017 and a change in product mix in the comparable period.

Operating expenses in the second quarter remained flat at $1,096,000 compared to $1,092,000 in the prior year period. Operating expenses included noncash expenses, depreciation, amortization and stock-based compensation totaling $40,000 compared to $51,000 last year. Operating expenses as a percentage of revenue increased to 27.9% for the quarter from 25.4% in 2016.

Net loss for the quarter ended June 30, 2017, was $55,000, or $0.00 per share compared to a loss of $65,000 or $0.00 per share a year ago. This is the result of increasing margins and operating discipline.

Now on to the year-to-date results. For the first 6 months 2017, revenue was down 12.9% at approximately $7.5 million compared to approximately $8.6 million in the prior year. Revenue declines were due to the previously mentioned factors. During the first 6 months 2017, 22% of our total revenues were generated from Canada sales.

Promotional allowances decreased $262,000 to $730,000 for the 6-month period, primarily due to onetime items associated with the 2016 launch of 7-Select as well as timing differences from other promotional programs. Profit margin in the first 6 months remained relatively flat at 25.6% in 2017 compared to 26.3% in 2016. Factors impacting margins included different year-over-year pricing from the initial launch of 7-Select in 2016, offset by a price increase in our Jones glass bottle midway through the period.

Operating expenses for the 6 months ended June 30, 2017, decreased to $2,123,000 from $2,198,000 in the prior year. However, they are now 28.4% of revenue, up from 25.6% in the comparable period. We believe our core discipline around expenditures is the primary reason for the relative stability in our operating costs.

Operating expenses included noncash expenses totaling $84,000 compared to $85,000 last year. Net loss for the 6 months ended June 30, 2017, was $252,000 or $0.01 per share compared to a net loss of $16,000 or $0.00 per share a year ago.

Turning now to our balance sheet. As at June 30, 2017, we had working capital of $1.7 million, and cash and cash equivalents of approximately $745,000. At this time, we believe that our current cash and cash equivalents, combined with our loan facility and cash from operations, will be sufficient to meet our current anticipated cash needs through the beginning of the 2018.

Cash used in operations during the 6 months ended June 30, 2017, was $282,000 compared to $462,000 in the prior year period, primarily due to timing of payables and the seasonality of inventory levels. We have a loan facility available for our working capital needs, which allows us to borrow up to approximately $3.2 million. Our eligible borrowing base as of June 30, 2017, was approximately $2.1 million of which we had drawn down approximately $1.5 million compared to a line balance of approximately $1.2 million at December 31, 2016.

I'll now turn the call back to Jennifer to give an update on our business plan.

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Jennifer L. Cue, Jones Soda Co. - CEO, President and Director [5]

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Thanks, Max. To remind everyone on the call again, our plan for the future is based upon 3 key initiatives: Jones, Lemoncocco and innovation. While innovation is inherently in our DNA and will always be a part of our philosophy, the time for focus and execution on our current portfolio is now: Jones in glass bottles and Jones on Fountain. Our Jones Fountain business in the second quarter had a boost with the launch of our Green Apple flavor on Fountain at 7-Eleven's in the Pacific Northwest as well as the launch of Fufu Berry [flavor in this] same region.

In addition, we are seeing more and more smaller regional restaurant chains approach us to switch out their fountain offerings from Coke or Pepsi as word gets out that there is the Jones Fountain offering available. Landing one large chain account in the Fountain business can and will be substantial for our overall business. In the meantime, we are responding to the individual and small regional chains that make sense for us to partner with.

Chains that are run by executive chefs that are forward-thinking, hip, and want a better-for-you and different fountain program appear to be our sweet spot. Some great examples of these smaller regional but highly influential chains include Benjyehuda urban street food in Chicago as well as Great State Burger here in Seattle.

Benjyehuda urban street food in Chicago is a QSR chain of 5 locations who just this past month has chosen to replace its Coke fountain machines with Jones Fountain machines. Benjyehuda is a very popular and growing QSR chain concentrated right now in downtown Chicago. This chain will be serving Jones on Fountain, Lemoncocco, and Jones glass bottles by mid-August 2017. We are thrilled that this forward-thinking restaurant chain has chosen all of our brands, including leading with Jones Fountain.

Another great upcoming QSR chain in Seattle is Great State Burger, which has grown to its fifth and very busy location, while touting that it probably serves Jones Soda on fountain. Great State Burger was recently profiled in the Thrillist top 100 better burger chains in America in June 2017, highlighting their choice for Great State, not only for their amazing burgers, which they do have, but also for neat touches like their choice of the Jones Soda Fountain machine. We are responding to inquiries daily and setting up our fountain machines in cities across the U.S. and Canada.

Our other growth initiatives, Lemoncocco, also continues to expand. I am very excited to announce that any day now you will find Lemoncocco on shelves that any of the 39 Whole Foods locations in the New York-New Jersey division. This will be our first Whole Foods division in their network to sell Lemoncocco, and we are very happy to have landed this region. Following the New York-New Jersey division of Whole Foods will be the South Pacific region, which will kick off Lemoncocco in September across their 61 locations in Southern California, Arizona, Nevada and Hawaii.

Equally important to us is the setup of the Mariano's grocery chain in Chicagoland. In the month of July, Lemoncocco rolled out in all 40 locations of Mariano's, which we supported with sampling. Mariano's has been high on our target list as they are a key chain in Chicagoland area. They have an obvious Italian heritage and as well are a successful division of the Kroger grocery chain.

And back to the West Coast. After their reviewing the SPINS data for Northern California with respect to Lemoncocco, the Safeway Northern California division approached us to get Lemoncocco into their stores for this summer. As we speak, we are rolling out into the 200-plus Safeway locations in Northern California and are following this up with sampling of the brand in store.

In addition to this, we have also received word that the Raley's chain in Northern California will be bringing Lemoncocco into all 150 of their locations by the end of August. These new chains are all fantastic, but what continues to make me most confident in the future of Lemoncocco is the staying power of our brand within our original retailers and distributors.

In 2016, we launched Lemoncocco into some great specialty grocery retailers, such as PCC and Haggen, in the Northwest; Fresh Thyme and Heinen in the Midwest; and Bristol Farms, Mollie Stone's and Bi-Rite in California, just to name a few. We continue to sell well in all original launch chains.

We have created a brand that is on trend. It is all natural and only 90 calories. With this, you get a great tasting hydration beverage as it contains the cream of the coconut and Sicilian lemons. Lemoncocco is becoming a multipurpose beverage that is also great for food pairing and a great cocktail mixer. Once people try Lemoncocco, they love it.

Finally, our 7-Eleven business continues to strengthen. Our co-branded product line has settled into a nice piece of business and in approximately 7,000 of the 8,000 locations nationally. We are working with 7-Eleven to continually introduce new flavors to the lineup. You will begin to see some new flavors at 7-Elevens in late Q3 and then another new one into the first quarter of 2018.

In addition, we will continually take advantage of opportunities in craft soda sets that retailers increasingly create across both the U.S. and Canada. And finally, we will evaluate the rollout of Spiked Jones in the third and fourth quarter, with plans to move forward into new markets once we see pull-through and consumer acceptance.

Finally, I would like to officially welcome to our Board of Directors, Mr. Jeff Anderson. Mr. Anderson has over 30 years in consumer product goods of which many were as a CEO and business owner and a successful track record of building these businesses. In addition, Mr. Anderson has recent experience in CPG distribution through his board position as a growing and successful Pacific Northwest distributor. We look forward to having Jeff's expertise to assist in building our portfolio of beverages and our company. We will continue to evaluate candidates for board as well as the entire Jones' team to ensure we have the right mix of talent to take the company to the next level.

I will now open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And will go to Galileo with HyperChange.

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Galileo Russell, [2]

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Jennifer, I was wondering if you could give us any hints on the size of Lemoncocco's business in the quarter or even like a rough estimate of how many locations within?

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Jennifer L. Cue, Jones Soda Co. - CEO, President and Director [3]

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For the -- yes, that's a tough question. In the second quarter, I mean, again, the number of chains that I just outlined that we've land have all sort of rolled into the third quarter. But yes, in terms of the number of locations for the second quarter, I would say -- I mean, I have to take a guess at that there's numerous distributors, and we don't always have the account list. So again, I would just be taking a stab at that. I can work on that and get back to you, Galileo.

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Operator [4]

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We'll go next to [Gary Getz].

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Unidentified Analyst, [5]

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Yes. Just wanted to comment on Spiked Jones. I guess, the 2 largest apple production states in the U.S. are Washington and New York. And wanted to encourage you to go national as quickly as possible?

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Jennifer L. Cue, Jones Soda Co. - CEO, President and Director [6]

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Yes, we hear you, [Gary]. We are -- as I said, we just finished production in late July, and we are rolling it out. It's tighter months in September here in Pacific Northwest. But the one thing we really learned very well from, say, Lemoncocco was to really focus, make sure that the brand works in one region. And especially with the alcohol laws around the country, we really want to focus, make it work right here, but definitely, we'll be entertaining other markets. We have not only New York as the second largest apple growing market. Our friends up in Canada, our distributor up there is by original origin, they are apple tree farmers. So they are interested as well. But they as well just want to see us roll it out in the Pacific Northwest, get it up and running and make it a success here first before taking on other states. So we will definitely -- tasting it and looking at it, it's going to be something that's going to go national. But we just want to make sure it's done right.

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Unidentified Analyst, [7]

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Okay. That's good to hear, and I wish you the best, and hope to hear great result for next quarter.

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Jennifer L. Cue, Jones Soda Co. - CEO, President and Director [8]

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Okay. Thank you, [Gary].

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Operator [9]

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(Operator Instructions) And we have no further questions at this time.

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Jennifer L. Cue, Jones Soda Co. - CEO, President and Director [10]

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All right. Well, we'll just end here by saying thank you again for your interest in our company. And we will speak to you in early November, when we report our third quarter results.

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Operator [11]

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And that concludes today's conference. We thank you for your participation.