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Edited Transcript of NBEV.OB earnings conference call or presentation 8-Aug-19 12:30pm GMT

Q2 2019 New Age Beverages Corp Earnings Call

DENVER Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of New Age Beverages Corp earnings conference call or presentation Thursday, August 8, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent David Willis

New Age Beverages Corporation - CEO & Director

* Gregory A. Gould

New Age Beverages Corporation - CFO

* Olivier Sonnois

* Olivier Sonnois;President of North America

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Conference Call Participants

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* Aaron Thomas Grey

Alliance Global Partners, Research Division - MD & Head of Consumer Research

* Michael John Grondahl

Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst

* Cody Slach

Gateway Investor Relations - Director of IR

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the New Age Beverages Corporation Q2 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Cody Slach. Mr. Slach, you may begin.

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Cody Slach, Gateway Investor Relations - Director of IR [2]

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Thanks, and good morning. Thank you for joining New Age Beverages Corporation's 2019 Second Quarter Financial Results Investor Call. I am Cody Slach with Gateway, the IR counsel for New Age. I'd like to welcome you all to the call today, and thank you all for joining.

On today's call, we will have Brent Willis, CEO of New Age Beverages; Greg Gould, CFO; and Olivier Sonnois, President of North America and the founder of the Brands Within Reach group, that New Age recently acquired just after the close of the second quarter.

I'd like to remind everyone this call may contain certain 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 risks and uncertainties. The transcript of today's call will be available on the company's website within the Investors section at newagebev.com.

I'd now like to turn the call over to Greg Gould, Chief Financial Officer. Greg?

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Gregory A. Gould, New Age Beverages Corporation - CFO [3]

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Thanks, Cody. For the second quarter 2019, we delivered net revenue of $66.3 million, an increase of 397% versus the second quarter of 2018. The second quarter results were also up sequentially 14% versus Q1, particularly important, given the seasonality in our Morinda business is very limited. Within our segments, our New Age group was up 7% organically in Q2 versus the second quarter of 2018. All brands performed reasonably equally with Búcha continuing to be our best performer, both during the quarter and year-to-date.

Our direct-to-store distribution continues to expand, and we have added a number of new brands to the group in addition to expanding the breadth and depth of the division. Morinda also performed extremely well across most markets. Our largest market Japan was up 2% in the quarter versus prior year, and in the month of June, was up 9% versus prior year. China had a difficult quarter due to the government restrictions on the industry that were only recently lifted. In all other markets, including Latin America, Southeast Asia and Europe, Morinda was up 40% organically in the quarter versus prior year.

Gross profit. The firm delivered $41.7 million for the quarter ended June 30, 2019 versus $1.8 million in the second quarter of the prior year, an increase of 2,268%. As a percentage of sales, this equated to a 63% gross margin versus 13% in the prior year. This reflects a shift in the mix of our business. Total operating expenses were $44.6 million, down $2.5 million versus the first quarter of 2019, but up versus the second quarter of 2018 due to the increased SG&A associated with the Morinda acquisition that closed on December 21, 2018. Also included in this amount was an unrealized gain of $6.7 million from the change in fair value of the Morinda earn-out obligation, which was partially offset by $3.1 million in noncash expenses and a $1.5 million impairment charge.

We had a net loss of $11.7 million or $0.15 per share in the second quarter of 2019 versus a net loss of $3.4 million or $0.09 per share in the second quarter of 2018. Adjusted EBITDA for the second quarter of 2019 was positive $14,000 versus a loss of $2.2 million in the second quarter of the prior year.

Reviewing the balance sheet. As of June 30, 2019, we had $86.6 (sic) [$83.6] million in cash and $57.8 million in working capital as compared to $42.5 million in cash and $40.9 million in working capital at December 31, 2018. At the end of June, we had $331.7 million in total assets compared to $286.9 million at the end of December 2018, an increase of 16%.

Beyond the improved financial results for the business, we expanded our brands with the Marley family, completed the Brands Within Reach acquisition, and amended our East West Bank loan agreement of fixing our interest rate at 5.39% for the remainder of the term. Also this quarter, we continued to strengthen our team and enhance our public company, corporate governance and financial reporting, which will lay a foundation for future organic growth and potential acquisition integration.

And with that, I'd like to pass the call back to Brent.

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Brent David Willis, New Age Beverages Corporation - CEO & Director [4]

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Thank you, Greg. Overall, I would say, we performed to expectations in the quarter. There are a lot of very good things happening and some continual challenges, both of which I'd like to discuss on the call today.

First, let's address some of the negatives. Number one, we only did $66.3 million in revenue. Yes. It is up dramatically versus prior year, and yes, it's up sequentially versus the prior quarter of 14%, and yes, it's above the consensus estimate. But I feel we could have done better. We had a number of markets where we just did not get shipments out before the end of the quarter, so that revenue gets pushed into Q3. And overall, I feel as if we just missed out on too many of the opportunities for growth. Number two, the brands. New Age was up 7% organically, but only 7%. And again, I feel we could have done better. Yes, we began our first-ever national brand sales with Walmart. Yes, we began our first-ever national brand sales with 7-Eleven, but there is a big difference between getting authorization and beginning shipments, which we did and ultimately getting on all of the store shelves and getting all of the franchise owners and individual stores at 7-Eleven, for example, to comply. It just did not happen yet. And as a result, total revenue from these 2 chains, is honestly, way under where we expected them to be. It will happen. It's just slower than anticipated.

Number three, CBD. Yes, we did launch CBD in the U.S. and in Hong Kong, China. Yes, it's already contributing revenue. But our CBD-infused beverages are not out yet. When we were first planning on this, already had our samples and already had commitments from major retailers in Q4 of last year. We expected to be able to execute shortly after the passing of the farm bill. What we did not foresee was the FDA completely making navigation as murky as the Straits of Hormuz and to add insult to injury there allowing thousands of other small companies to get out there first, not public enterprises that are compelled to comply with federal law. So it slows us down in the U.S. It would have already been a much more substantial impact and it allows all of these literally thousands of other smaller competitors to get out there first in the U.S. in beverages.

And number four, China. Yes, New Age still has a great and super high potential operation there. But the impact of the government restrictions on the industry in the first half of the year were draconian and we too were affected. And to make matters worse, given the U.S. is such a, I would say, globally integrated economy with China, the whole tariff stance has also had a negative effect on our business. Not only does our aluminum and our glass prices go up significantly, but especially recently, the highly charged negative rhetoric, I would say, against the U.S. going on now within Mainland China also puts a significant short-term damper on our business. Notwithstanding those opportunities for improvement, there are also a number of positives.

The Japan growth and momentum with all our independent products -- product distributors has taken 6 months, but they are doing very well. Mind you, our Japan business has not grown for almost 10 years. So turning this around, as we have in the first half, after 10 years of decline, is a major accomplishment and credit to our Japanese team. Number two, in the U.S. we just started shipping our teas in a brand product partnership with Circle K. And they are, indeed, getting it out to the stores, and it is having the expected impact so far. And in addition, because we did, they added Búcha in 2 of their largest regions for us into their assortment.

And while we're talking about the New Age brands, we have just completed the registration of the first wave of our brands in 33 countries and shipments have already begun to these markets. And the Health Sciences products also are now contributing both revenue and profit.

The next positive, acquisition integration and synergy capture. We are now 6 months, but really only 6 months into the acquisition of Morinda, and its integration and the impact of the human resources on New Age overall, I would say, has been profound. We are ahead of our projected cost and revenue synergy expectations. And in the quarter, we completed a major transportation and logistics optimization initiative that captured just over $1 million in annual savings. We also just completed the installation of Oracle Enterprise business systems throughout New Age. And for frame of reference, the last time I put in an ERP system like this, it costs me more than $1 million in the implementation fees and took 2 years. Here we did it at no cost, 100% with internal resources, and it went live July 1.

The 2 quick asides on the Morinda acquisition and acquisitions overall: Number one, integration and synergy captures actually not that easy, but we at New Age, I think we have it down. And number two, something I just don't understand. For example, when I was at AB InBev and helping to build that company, no one ever talked to us about what percentage of my growth was coming from organic versus external growth. They just wanted to grow. And here at this derivation of InBev, I get asked that question all the time. And I think by the point that I'd like to articulate is, we will continue to both execute organically and selectively, maybe very selectively, pursue external growth as long as the initiatives are accretive for shareholders and support the platform we are looking to build to ultimately gain competitive advantage. And this takes me to the last positive that I want to talk about on today's call, the BWR acquisition.

This acquisition was incredibly accretive and a great value for the New Age shareholders. The shorters created fear and doubt and the stock went down as a result. Look, we just added some of the world's best beverage brands to New Age, the Nestea license is the exact one we used to have at Coke. And now we, New Age, we have the brand. And relative to our other brands, as much as it's difficult for me to say, comparing the New Age brands to Nestea Elite Coffee, Volvic, which is the world's second largest water Evian well. Honestly, there's just not a legitimate comparison. So I've asked Olivier Sonnois, the founder of the Brands Within Reach Group, who joined New Ages part of the acquisition to provide some insight into how he's framing the opportunity. Olivier?

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Olivier Sonnois;President of North America, [5]

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Thanks, Brent. Good morning, everybody. As a mean of introduction, I have spent the past 25 years in the beverage industry at Danone for many years; Acirca , organic food company, which was sold to Hain Celestial. And then I founded and self-funded BWR more than 12 years ago. And here is a simple perspective I have on the beverage industry. There are only about 50 companies over $100 million in revenue in the sector. And there are more than 10,000, which are under $10 million. Why? Well, it is just very challenging to scale and even more challenging to scale in a profitable manner. So I thought it would be good to share with you why I chose to do the deal with New Age. First and foremost, I really like the people, and I really like the culture. It is a perfect match. We have the same committed culture at BWR, dedicated to bringing something different to the category and providing healthy products for consumers. The cultural and team integration has been so easy, really effortless, as we have had been operating together all along since day 1.

Number two, it solves my scale and resources challenges. There is only so much you can do on your own. And New Age with Morinda could bring the size and resources to build this fantastic globally iconic brands, bigger, better, broader and faster. And number 3, I think we also solve the challenge for New Age. They have great brands in their portfolio, but not any like Nestea, for example, which has almost 90% consumer awareness. And that is a great and imported accelerant for New Age. They most likely needed us at this stage.

Number four, they needed us not just for the brand but also for a very a well-orchestrated and flex structure and sales teams, our systems, our processes, we have been putting in place for the past 12 years. The New Age team was just getting started on people and processes, just because they were so new. And we had been out there for 12 years. They could have done it, but we acted as a huge infrastructure and organizational capability accelerant for them. It is those processes that enabled us to be breakeven on our own, even as a very small beverage company. One of the very few in fact, and if not the only profitable one, which was under $100 million in revenue. And now New Age has it all. And lastly, I would say, selfishly, we also wanted the New Age stocks because we believe, and rather, we know it has huge potential, even greater now with the addition of the BWR global brands in their system. So essentially, that's why I did it.

Now what have I seen so far? Well, it's still early days, 30 days since the close, but I'm very optimistic, and I see huge upside potential and lots of low-hanging fruits. There are so many key accounts and distribution windows across all channels, added to the support of a well-seasoned management and marketing opportunities for the New Age brands. Similarly, there are equal upsides and maybe even more for the BWR brand to New Age key accounts through their e-commerce system, which is very impressive and through their Colorado they have this system which is near-instant impact on brands and probably one of the best managed I have seen. Our brand partners are just very excited. And I am now very excited to build even more competitive advantage with our unique omnichannel system, which the Board and Brent have asked me to lead as the new President for North America.

As part of my on-boarding, I had the chance to be with the Board of Directors at the last Board meeting in Japan. Well, I have to say, they're not just strategic, like any Board should be, but they're very involved, they're engaged, they're in our face, and they're very demanding, but above all, they are amazing. I was very impressed as you can tell as we have exceptional strength in our Board of Directors. I also expect us to build competitive advantage with CBD across all channels and in a number of product forms. Like Brent said, would I have liked to have our CBD beverages out already? Of course, but having the option to prepare our launch more strategically and build a range of product forms across a range of channels might be, in fact, an even greater opportunity because that is something we can uniquely do at New Age because we have these omnichannel capabilities, which opens up even more opportunities for us that I'm not sure everyone comprehends yet, and the future will tell. So like I said, it's still early days, but I'm very excited for BWR, the company I created, to have joined forces with New Age. And we are indeed going to build a force to be reckoned with under my leadership and with our merged teams. And I really think we're just getting started. Brent, back to you.

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Brent David Willis, New Age Beverages Corporation - CEO & Director [6]

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Thanks, Olivier. I might ask you just one question while we have you on the phone before your flight, actually. What would you say your framing is, your biggest opportunity and maybe your biggest challenge?

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Olivier Sonnois, [7]

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The biggest opportunity we have ahead of us is really to organize our stable of brands and to position them in every category that we're competing in. And we're taking serious steps into that already. Category management being one of them. Education of our retailer partners on upcoming trends and researching even deeper consumer insight is clearly opportunities that we have. Our challenges we have right now is to move as quickly as the world expect us to do so and to execute results so quickly. The results will come, and they will come almost with certainty. We just have to accelerate things, and hiring right now, the best talent is something we've been doing even more recently, and I think we're building a team of champions out there. And I think this is what's going to help us the timing challenge that we're faced with.

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Brent David Willis, New Age Beverages Corporation - CEO & Director [8]

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Awesome. Thank you very much, Olivier. I think North America represents one of the biggest upsides in our plan in both 2019 and in 2020, and I'm excited to see the team succeed going forward under Olivier's leadership.

And to that end, at the close of the second quarter, we put out an 8-K that Randy Smith, President of Morinda was retiring for some serious health issues effective almost immediately. Randy contributed 15 years of outstanding leadership to Morinda and to New Age as part of the merger. And frankly, without him, the transaction wouldn't have been possible, and without him, we would not have enjoyed the level of success we have had since the merger. He will be missed. With that catalyst, however, and with the evolution of our strategy at New Age, it challenged us to revisit our organizational structure and determine if it followed directly enough and flowed from our strategy. The answer, with Morinda as a standalone division was not as much as it could.

And given our focus and our opportunities in key regions, especially Asia Pacific, China, North America and given the portfolio of products, not just beverages, we want to drive primarily in those regions, embodying our omnichannel approach, and we felt that moving to a regional structure with incremental resources in those regions and bringing our business and our leaders closer to consumers was the right path to take. So as Olivier just mentioned, he's been named our President for all of North America. Josh Hillegass will continue to run our distribution operations. A new President for Asia Pacific is forthcoming. And [Sean Whitney], former VP of Sales & Marketing at Morinda is now President of the Rest of World region. Sean did a great job in marketing at Morinda and his work is cut out for him with Latin America, Scandinavia, Russia and the Baltics, Europe and new markets reporting to him, especially since in Q2, his area was up 40% versus prior year, and his targets are substantially greater than that. So that's just a quick update on the positives and negatives. But let me ask Greg to comment on where it will lead us financially versus our outlook.

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Gregory A. Gould, New Age Beverages Corporation - CFO [9]

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Thanks, Brent. As we move forward into the third quarter of 2019, we believe that revenues should be in the $70 million range. And most likely, will be in the high $200 million range for the entire year of 2019. We believe that there could be some upside to this guidance, such as how quickly China can rebound, the amount of lift we can get from the BWR acquisition and integration with our brands products and if we are able to sell CBD in the United States in the second half of 2019, which is currently being restricted by the FDA.

In addition to revenue, we expect to continue to be positive on the adjusted EBITDA line for the third quarter and the entire year as we make necessary investments in our brands, distribution, market expansion and people consistent with the new regional structure that Brent mentioned earlier in the call to enhance our future revenue growth.

Brent, with that, I'll hand it back to you.

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Brent David Willis, New Age Beverages Corporation - CEO & Director [10]

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Thanks, Greg. So let's see if we can surprise to the upside again. Look, even at these levels, we still only trade at about a 1 multiple of revenue, which is 4 to 5x less than the average of our peer group. So we see substantial incremental value and upside for our shareholders going forward. But better to be conservative than the opposite, especially with how new our firm is and our new recent additions.

As I mentioned, we have some components of our company that I am not happy with. And frankly, the addition of the BWR team addresses one of those most important elements of dissatisfaction. Even with those pluses and minuses, however, as I mentioned on our last call, I believe we have the discipline, and the Board and management team, characteristic of a much larger and robust company, a bulge bracket one. But on top of that, we have all of the growth and prospects of a small cap. We've been planting the seeds, and we expect that they will begin to bear fruit for all our shareholders, as we begin our -- and build our components of competitive advantage, play our game on our terms and action emerging growth opportunities faster and better than anyone in the industry, and frankly, just build this great company. The legacy leaders with their legacy soft drink portfolios have had their time. Now it's our time. And now it's time for a New Age. And with that, I'd like to open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Aaron Grey with Alliance Global Partners.

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Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [2]

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First question is just going to be on the updated guidance. So $70 million for next quarter, just digging into the full year, when you say high-$200 million, if we can just narrowed that down a little bit, would it be about $290 million? Just wanted to try and get a better sense of how much of a ramp-up you would expect in 4Q versus 3Q? So some color there and then what would kind of drive that ramp-up in the fourth quarter versus 3Q which seems to be -- would be pretty significant would be helpful?

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Gregory A. Gould, New Age Beverages Corporation - CFO [3]

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Yes. First, let me jump in on this real quick. So then when we look at the entire year, we have said somewhere within the high-$200 million. Could it be 290? Yes. I mean there's lots of things we see that could really affect us here. And the biggest being China and just how quickly that really rebounds. And really what happens to CBD during the second half of this year, because we currently have CBD top goes out within via U.S., but we really see that there's a big market here for infused beverages. And we're just looking for more guidance there from the FDA. And once we get that, we think and hope that the floodgates could really open up. Brent, do you have more on that?

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Brent David Willis, New Age Beverages Corporation - CEO & Director [4]

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Yes, I'd just add. I think that's right. I mean we want to be conservative. But the truth is, given we're new and given we have a number of moving parts. There is sensitivity in the business. So that's why we want to guide to what we think is the lower end of our spectrum. And if those initiatives, as Greg mentioned, materialize, great, but it's just not 95% sure that those things will materialize. And as you mentioned, there's CBD in beverages in North America. There is further expansion of our topicals, there's the whole impact of BWR and better short-term impact on all of our brands in North America. And frankly, a number of CBD initiatives outside the United States that could positively impact, but that -- what all that implies with those 4 or 5 different variables is variability and sensitivity. So we'd rather be conservative and just as we did this quarter, exceed to the upside versus the opposite.

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Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [5]

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Okay. Great. That's helpful. And then just digging a little bit deeper on China. You mentioned some of those restrictions being lifted. Can you just give some color in terms of the timing of when those were lifted? And then if you can give any color in terms of how sales kind of trended monthly, if there was kind of some ramp-up there? And what you expect going forward? Or it sounds like now you have another overhang in terms of what you saw with the tariffs and the broader kind of U.S. view in China. So any kind of color on China and what you're kind of seeing more granular in terms of sales, if you had seen any kind of improvement or if it's still just something you're looking for going forward That would be helpful?

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Brent David Willis, New Age Beverages Corporation - CEO & Director [6]

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Yes. Great question, Aaron. Yes, like I said, I and we all still feel we have fantastic potential in a fantastic organization in China. And it's a big growth and focus area for us. So all these things that we're talking about are short term impacts. The biggest short-term impact, again, had nothing to do with us. It was industry-wide that emanated with the SAIC and MOFCOM from actions to -- some actions that happened with some local Chinese companies. And then they just put the restrictions on the entire industry. And that was ultimately lifted in really the end of July, beginning of August, right? So that really affected us through there. But those restrictions for the most part are lifted, although we're still having to be very, very careful, and we're operating very delicately, but the actual and absolute restrictions were lifted in the beginning of August. When we were there and we were there with the Board in the end of July, we had just a fantastic month in terms of performance and throughput. But as I mentioned, we didn't get all the shipments out of the door. So that affects us for the quarter. But what it says is, boy you really had a lot of good upside and good momentum as soon as these restrictions and the kid gloves are taken off in China. So we do see it as short term. We do see it as getting back to our run-rate that we were last year, going forward for the end of the year. But the impact in the beginning of the year means that that's lost for us. The tariffs and other stuff, I mean yes, the tariffs affect us from a cost of goods sold standpoint in North America, although we're looking at different locations for supply from glass and aluminum, but that's one piece, but there is this undercurrent now throughout the environment there in China coming from the media and the Chinese government that is rhetoric against U.S. companies and all U.S. companies, and the big driver of our business is new distributors, new independent product distributors coming on into our system. And if there's a lot of negative rhetoric about interacting or working or overall with the U.S. or U.S. companies that has a negative impact of people wanting to be associated with or partner with U.S. companies. So I just start to see the undercurrent of that, and it's accelerating and the minute we can start to make progress in the tariffs, which will happen. Again, it's a short-term issue. But as soon as that starts to happen, some of that rhetoric will start to ease, and we'll get back to normalized opportunities. That being said, our overall take on China is these are short-term impacts. We do not see any whatsoever, structural or long-term impact on our business in China. And in fact, we see significant upside potential. And we're taking the actions, both on a product standpoint, both in terms of business model with WeChat, e-commerce and our expansion beyond 10 provinces. We're taking those actions to significantly grow our business going forward and not just be at the mercy of some short-term fluctuations.

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Operator [7]

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(Operator Instructions) Our next question comes from Mike Grondahl with Northland Securities.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [8]

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Just a couple of follow-ups on Morinda. You gave some numbers out. But what did China do year-over-year and what did total Morinda revenues do year-over-year?

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Brent David Willis, New Age Beverages Corporation - CEO & Director [9]

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We don't break out China specifically. But some of the companies there are down significantly, 50%, 60% of their previous business. We're nowhere near in that kind of realm. But we don't break out and we don't communicate China specifically, and we'd like to maintain flexibility without communicating performance in individual countries. Overall, Japan is still our largest market. And so that was up, and especially up in June. And as I mentioned, from a pure volume throughput standpoint, China was up in June -- sorry, in June, as we did our big meetings with like 4,500 people that were there as part of our most business -- our business summit that we most recently had there. So a lot of the other markets, Latin America especially, Southeast Asia especially, are really expanding for us and starting to be significant contributors. U.S. was up slightly, but the big drivers were all these new markets, emerging markets, Southeast Asia and Japan in Q2.

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Gregory A. Gould, New Age Beverages Corporation - CFO [10]

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When you look at Morinda standalone or overall ...

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [11]

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Yes, overall.

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Gregory A. Gould, New Age Beverages Corporation - CFO [12]

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Yes, for year-to-date 2019 we're just over $100 million in sales there.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [13]

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Okay. I guess I get it $100 million, but is it up or down? What is it year-over-year?

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Brent David Willis, New Age Beverages Corporation - CEO & Director [14]

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Overall, it's all up. So if you look at a waterfall, Mike, it's all up. But all of that upside has essentially been offset by China. So every place is up, except for China. And so had we been just on track or continuing or been flat in China, boy, we would have had a just tremendous year, this year. But if you look at where we were and what we expected at the beginning of the year versus kind of our revised, more conservative guidance, one way to look at it is, it's 100% China, and we're up -- where it's actually kind of 200% China in terms of negative impact, offset by the improvement in New Age, the improvement in all of these other markets. So that's the one impact, but every place else were up.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [15]

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Got it. And then Morinda, you have an earn-out with Morinda. And I think the likelihood of you paying that earn-out went down because of the $6.7 million kind of gain that you took. So how is Morinda's EBITDA trending because I think there's like a waterfall? If they do $20 million of EBITDA, they earn it. If they don't, I think it falls to 0. Could you just remind us kind of how that works and how it's trending?

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Gregory A. Gould, New Age Beverages Corporation - CFO [16]

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Yes. With that, there's definitely a waterfall. They needed to hit a $20 million EBITDA number, and if they hit that, they would get a $15 million payout in the -- basically, the first quarter of 2020. And then with that for every dollar that they're short of that $20 million, it goes down by a multiple of $5. So...

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Brent David Willis, New Age Beverages Corporation - CEO & Director [17]

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If they hit $15 million, they get 0 basically.

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Gregory A. Gould, New Age Beverages Corporation - CFO [18]

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Yes. Yes. So then, we did make a adjustment this quarter, bringing that down pretty substantially. We had accrued on our books as of December 31, that there would be a little bit more than $13 million of a payout.

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Brent David Willis, New Age Beverages Corporation - CEO & Director [19]

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Do we still have -- we still have...

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Gregory A. Gould, New Age Beverages Corporation - CFO [20]

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And then now we still have about $6.5 million, $7 million accrued on the books as of June 30, and we're going to continue to evaluate that during second half of this year.

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Brent David Willis, New Age Beverages Corporation - CEO & Director [21]

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And just think about it, Mike, some of the markets and on average, Morinda is like 80% margin or high-70% gross margin. So if you have China, round numbers of China is down $20 million. And you've got an 80% margin in there. That's a $15 million, $16 million negative EBITDA impact. So that gets wiped out and then you offset that with all the growth in the other markets. So that's why we said, look, we're going to continue to make investments in the business. We're making investments in people, we're making investments in the brands, we're making investments in the launch and expansion of new products, whether it's Health Sciences, CBD or the other things, in North America and around the rest of the world. So that's why we said, look, we're just going to pay our bills. We're going to maintain positive EBITDA. But because of Morinda, its size and scale for overall business and because of what's happened in China this year, that wipes out a big piece. And then again, a simple way to look at the business is, boy it's really doing well at New Age. Rest of world, Japan, even in the U.S., offset by the negative impact on China, which, again, we believe is short term.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [22]

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Got it. Okay. Shifting over to Walmart and 7-Eleven. You kind of said those were under your expectations. Is it a distribution issue? Is it a demand issue? Why are those under?

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Brent David Willis, New Age Beverages Corporation - CEO & Director [23]

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It's all distribution. So the way these systems work, especially 7-Eleven is it puts you in the national planogram and they authorize you, and they make initial orders. So that has happened with 7-Eleven and Walmart, where we went in these planograms. But then with 7-Eleven, not all of these store owners and franchise owners in all of these regions across the world and even in some of the corporate-owned stores, they don't put it on the shelves, they don't set it, they don't comply with what corporate wants to do. And if you look at within the 7-Eleven system, there's always massive lawsuits going on between the franchisees and corporate. So it's a very difficult system to operate with. So we don't have a demand issue. Or we don't know if we have a demand issue, frankly, because we're just getting on the shelves now. So getting it on the shelves has been really challenging, and we're having to do additional things because we just can't rely on the chain, especially in the case of 7-Eleven to get it out on the shelf. So it's not a demand issue. It's a distribution execution issue within their own systems that because they have those issues in their systems. We're having to take it on to address the problem ourselves.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [24]

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Got it. That helps with 7-Eleven. Is Walmart similar? Or how would you characterize that?

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Brent David Willis, New Age Beverages Corporation - CEO & Director [25]

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Walmart is similar less so from an execution standpoint versus 7-Eleven and very much less so versus Circle K, which we never really communicated and where we didn't communicate at all. But the Circle K expansion has gone really well. But that's not a franchise model. And they are really hitting on all cylinders that really just shipped in the very end of the quarter. So that's going particularly well for us. But Walmart, same kind of issue in terms of getting it out and getting it out to all the stores, and then driving the traffic and awareness. So mind you, when there's reasons we love our omnichannel system is because when you shop at traditional retail category, it's such a sea of confusion in the beverage industry with thousands of products and 40, 50 linear feet of shelf space of carbonated soft drinks to sort through until you get -- and you get to find the healthy products and healthy beverages. So it's just a matter of time, and we're doing some things now directly with Walmart in terms of rollbacks and promotional incentives inside the store to build awareness of the availability of the Marley brand now at Walmart.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [26]

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Got it. And then just lastly, on CBD, besides topicals, would you say you're just waiting for the FDA framework, so you're in a holding pattern until you get more insight? Or they say how to proceed?

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Brent David Willis, New Age Beverages Corporation - CEO & Director [27]

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Well, we are proceeding outside the United States. And I've always said, this is a global opportunity for us. So one of our big variabilities is or sensitivities to the upside is how quickly and broadly can we get CBD out outside the United States in all of these markets. So there are regulatory barriers and hurdles and all these other international markets that have been -- we've been working to overcome. And we have had some very good success on overcoming some of those regulatory barriers in those other markets that gives us a lot of optimism for CBD outside the United States in the second half of the year. So it's just a matter of how quick and how fast and how broad that gets and in what channels we go. Within the United States, as I said, it's as murky as the Straits of Hormuz , that's a pretty difficult place to navigate these days, and it's been murky for uu too just in terms of unclear rules that apply for sure to public companies and apply to public companies that have to comply with federal law like ourselves, but they're not being policed in terms of some of these other smaller companies that are getting out there. There may be some things that we can do where we can, indeed, comply with federal law, comply with our requirements as a NASDAQ-listed company and still be able to execute on the beverage side. But we're making sure that we can do that from a legal standpoint and making sure we can do that with the FDA. And so we're in constant dialogue with our lawyers that are in dialogue with all of these different entities to be able to -- to make the navigation a lot more clear than it is. But CBD in the United States is another potential upside to how we're seeing the year. But it's just too many unknowns at this point.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [28]

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Fair. Any update on the Docklight partnership?

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Brent David Willis, New Age Beverages Corporation - CEO & Director [29]

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Because we have that partnership, that is one potential way that we can navigate the waters. I'd rather have the market and consumers and our investors see that delicate navigation that ultimately results in effectuation and our Marley brand on shelves in beverages. So I expect to have positive news for our shareholders and consumers, frankly, with this great brand in that area. And because of that unique relationship with Docklight, it may be a way to be able to execute and execute it in a very significant way this year.

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Operator [30]

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Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Brent Willis for any further remarks.

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Brent David Willis, New Age Beverages Corporation - CEO & Director [31]

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All right. Thanks, everybody. I appreciate the time on the call. Again, we're pleased with a lot of things happening. We've got improvement opportunities just like everybody does, but simple way to look at the business is, China has had a negative impact on the first half, offset by, frankly, a number of good things happening in a lot of different places that we expect to continue to effectuate an action for the rest of the year. We love the business, and we love the potential that our business represents. And like I said, even at high-200S, where Greg said, we are calling the business right now, even still at that level, that means we're trading at 1x revenue or about 75% below that of our peer group. So we think there's a lot of upside for our shareholders going forward as we continue to execute the business. Thanks very much for joining the call.

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Gregory A. Gould, New Age Beverages Corporation - CFO [32]

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Thanks, everybody.

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Operator [33]

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Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.