Mama's Creations, Inc. (MAMA) Q3 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the MamaMancini's third quarter fiscal year 2019 financial results conference call. All participants will be in listen-only mode. [Operator Instructions]. Please note, today’s event is being recorded. I would now like to turn the conference over to Joe Diaz with Lytham Partners. Please go ahead, sir.

Thank you, Rocco. And thanks to all of you for joining us today to review the financial results of MamaMancini's Holdings for the third quarter of fiscal year 2019, which ended on October 31, 2018. With us on the call today representing MamaMancini's are Carl Wolf, Chairman and Chief Executive Officer; Matt Brown, President and Chief Operating Officer; and Larry Morgenstein, Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. And before we begin with those prepared remarks, we submit for the record the following statement. Statements made by the management team of MamaMancini's Holdings during the course of this conference call that are not historical facts are considered to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements describe future expectations, plans, results or strategies and are generally preceded by words such as may, future, plan or planned, will, should, expected, anticipate, draft, eventually or projected. You are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the company's 10-K for the fiscal year ended January 31, 2018 and other filings made by the company with the Securities and Exchange Commission. Forward-looking statements reflect management's analysis only as of today. The company undertakes no obligation to publicly release the results of any revision to these forward-looking statements. With that said, let me now turn the call over to Carl Wolf, Chairman and Chief Executive Officer of MamaMancini's Holdings. Carl?

Good morning. Thanks for joining us on today's call. We appreciate your continued interest in MamaMancini’s. As I indicated in yesterday's press release, we turned in a solid performance in the third quarter of fiscal 2019. On a sequential basis, revenues were up 47% versus the second quarter ended July 31 and 12% versus the comparable quarter last year. During the second quarter, sales were negatively impacted by changes in the purchasing offices in a number of our major retailer customers, not reflective of our product quality, trade relationships or consumer acceptance, purchasing managers at major grocery chains come and go usually to no effect as it relates to MamaMancini’s. However, in the second quarter, we were negatively impacted by a change in buyers. In the previous conference call, I said that we operated a dynamic business where conditions can change suddenly and that we consider the results of the second quarter as a one-off event and did not expect any long-lasting impact. That has turned out to be the case. Sales for the quarter came in at $8.2 million, a record, versus the $5.6 million reported in the second quarter and the $7.4 million reported in the third quarter of fiscal 2018. Margins for the third quarter were up by approximately 300 basis points to 34% as we benefited by a more favorable product mix and continued expense control. We also incurred higher depreciation expenses in the cost of goods, which resulted in about a 2% reduction in gross profit, which was offset by a like amount in operating expenses, so that the net effect, even though it’s slightly affected our gross profit, was the same in terms of net income. Our expectation is to grow retail product placement spots to between 50,000 to 53,000 in our retail partner locations compared to the 45,200 spots in the just completed quarter. We expect that cash flow in the second half of the year will be more than sufficient to finance the growth of revenues going forward. As we announced last year, we have retained Akin Bay Company, in partnership with Kernick Advisory Group, to investigate strategic options for the shareholders of MamaMancini’s. Akin Bay and Kernick are experienced independent investment bankers in the natural and organic foods category. Given the current strong US economic environment, management and the Board of Directors feel this is an appropriate time to evaluate the company and investigate if shareholder value can be substantially enhanced. Potential options might include strategic acquisitions, a merger with larger competitors in the food and manufacturing business, recapitalization of the company or other possibilities. There is no guarantee that any transaction will occur. However, given the extremely positive fundamentals of the economy, our shareholders deserve a comprehensive review. Our expectation is to have a determination on strategic alternatives sometime early in the first quarter of fiscal 2020, which begins on February 1, 2019. At this point, I am going to turn the call over to our CFO, Larry Morgenstein, for a review of the numbers. After Larry's comments, Matt Brown, our President and COO, will provide his report on operations. We will then open the call for your questions. Larry?

Thank you, Carl. Revenue for the first quarter ending October 31, 2018 was $8.243 million, a 12.2% increase compared to revenues of $7.351 million for the same period in 2017. Revenue generated during the fiscal quarter primarily increased as a result of selling more product in the higher volume locations compared to fiscal quarter 2017. Third quarter 2018 gross profit increased as a percentage of sales to 32.6% during the quarter from the prior year's quarter showing gross profit percentage of 32.3%. This was caused by a favorable change in product mix which saw the firm sell more product to larger accounts that were net of all operational merchandising fees. Total operating expenses for 3Q 2018 increased by approximately $38,000 to $2.151 million versus fiscal 2017. This was an increase of 1.8% in operating expenses for the fiscal quarter even though sales increased 12.2%. We continue to closely monitor our spending and implement tight fiscal expense control oversight. Operating income in 3Q 2018 increased by approximately $278,000 to $536,000 compared to the fiscal quarter 2017. Net income for 3Q 2018 was $356,000 as compared to the same period 2017 of $29,000. Net income loss per share for fiscal 3Q 2018 was $0.01 compared to zero in fiscal 3Q 2017. The company's cash position as of October 31, 2018 was $460,000. The company reported long-term debt of $1.274 million as of October 31, 2018. The Manatuck Hill Partners note was renewed through May 1, 2019. The company continues to pay down the principal. Cash flow from operating activities for fiscal 3Q 2018 was $113,000 as compared to $336,000 a year ago. EBITDA for 3Q 2018 was $710,000 as compared to $386,000 in 3Q 2017. The completed integration of Joseph Epstein into MamaMancini’s has allowed the company to recognize operating efficiencies at the point of production, passing increased profitability to the firm. That completes my comments. And let me turn over the call to Matt Brown, our President and Chief Operating Officer. Matt?

Thanks, Larry. As Carl and Larry have been pointing out, we had a record-breaking quarter with regards to revenue. I'd like to add to that a record-breaking quarter, in especially the last month of the quarter with regards to production. Not only did the plant have a record-breaking production, it continued to have efficient production. This efficiency greatly contributed to the overall gross profit success of MamaMancini’s for fiscal Q3. For those on our call last quarter, you heard me talk about the completion of the plant renovations. Fiscal Q3 was our first full quarter that did witness what the plant can do with the right infrastructure. Even as the temperatures outside, in August and late into September, remain fairly warm, the new freezing capacity and temperature-controlled environment inside paid off. We moved more product through the plant than we had in prior quarters, which enabled us to produce in five days of production what would traditionally have taken us about seven days. With this control, we’re better also to manage the production runs and control our labor for the quarter. Fiscal Q3 saw the introduction of our Italian sausage peppers and onions into one of our major retailers, as well as a few airings on QVC which, of course, were sellouts on QVC thanks to Dan's ability to let the consumers taste our product through the beauty of TV. We've already aired that sausage product again on QVC in fiscal Q4 and we anticipate this becoming a staple for them. With more authorizations on the sausage and our stuffed peppers product, we’re continuing to see the growth of what we continue to call the kit projects. Our R&D staff is currently working with an active East Coast account, as we speak, to add the first launch of a chicken fettuccine Alfredo, which we anticipate before the end of fiscal Q4. In addition to the fettuccine Alfredo, R&D is continuing to fine-tune a few more pasta and protein-based kits as we move into fiscal 2020. All indications are that we should be prepared to offer at least 8 to 10 kit products for assembly at the store level. It is strongly our belief that the growth in the perimeter of the supermarket will be greatly enhanced by our ability to offer up these high-quality entrées that are completed at the store level by the store level managers. These kits will not only offer greater choice to the consumers, but it will also help the supermarkets control our inventory and overall costs. Lastly, back at the plant, we’re just now turning the lights on into our in-house laboratory. This will enable us to begin the micro and nutritional analyses on our products, with anticipated cost savings there of about $2,000 to $3000 a month to start. With that, I would now like to turn the call back over to Carl.

Thank you, Larry and Matt. Before we take your questions, let me say that we expect to conclude the year on a strong note. Fiscal year 2020 is shaping up to be another solid year for MamaMancini’s. We have new authorizations from a number of major grocery retailers around the country that we expect to kick in near the end of fiscal 2019 and into the first half of fiscal 2020. Our strategy of focusing on large national accounts continue to pay dividends that contributed to our growth and higher levels of operational efficiencies and elevated margins. We're also taking steps to reconfigure our balance sheet by retiring our note with Manatuck Hill Partners and arranging more traditional bank financing at favorable rates. With the completion of our planned expansion, we now have the capacity to support upwards of $50 to $60 million of annual sales. We continue to make progress toward that milestone and we are excited with the opportunities ahead in fiscal 2020. With that, let's open the call to your questions.

Thank you. [Operator Instructions]. And today’s first question comes from Howard Halpern of Taglich Brothers. Please go ahead.

Congratulations. Great quarter. Great start to the second half of the year.

Thank you.

In terms of, I guess, the kits that are on tap, is that going to help expand gross margin down the road?

Should be about the same. The higher sales will expand gross margin as we have more product go through the plant with relatively fixed overheads. The kits are pretty much the same gross margin level, pricing level as our existing product line, but higher volume incrementally adds between 20% and 25% operational profit to our business.

Okay. And what occurred in the third quarter, is that shift in expense from G&A or operating expenses into cost of sales? That’s a permanent shift of…

Yes.

…[indiscernible] 50,000.

Yes.

Okay. And you're pretty comfortable – I know you talk about expense controls, but you're pretty comfortable with the G&A level just going up incrementally from where we’re at right now?

Part of our G&A – freight, sales commissions, promotional merchandising expenses, royalties – are a direct variable of sales. That’s around 13% of sales, 12% of sales. The other expenses are relatively fixed.

Okay. And you talked about the authorizations coming down the road. If you had a crystal ball, by the second quarter of next year, where do you hope to see your number of SKU units and in how many retail locations?

If we are reasonably successful with indicated authorizations we would be around 75,000 SKU locations across the country.

Okay. I had another question about the third…

It’s up from 45,000 right now.

Right. About the third quarter, with the SKUs per – divide the SKUs into the revenue, this was your highest, $182 per SKU approximately. Is that a consequence of initial customers or is that a sustainable level going forward?

It should increase as we continue our business going forward. As we call out customers that had lower volume or SKUs at lower volume, we’re replaced them with SKUs that have higher volume. So, that should increase per store.

Okay. I think I've asked this before. But West Coast, how was that continuing to shape up?

We have not seen any material sales yet from the West Coast. However, we have a number of authorizations which we expect to happen in January or February. What happens is things tend to get delayed in supermarket and club store business. So, right now, we have been authorized. So, we are waiting for the first orders to begin in a number of locations and number of SKUs.

Okay. And also, I guess, food service, is there any groundwork being laid for that at this point?

No, we have right now not done any major activity in food service to date. We really have so much to do in the supermarket area. However, that is on our agenda for mid-year. We want to get the West Coast absorbed and get these two kits into the marketplace.

Okay. Thanks. And keep up the great work.

Thank you.

[Operator Instructions]. Today's next question comes from Herb Fleming , a private investor. Please go ahead.

Yeah. Good morning, everybody. I want to comment, a nice rebound in the quarter versus the previous quarter and last year. I have a couple of questions and I hope it's not too redundant. An authorization, as I understand it, is not an order. It's an indication of interest. Is that correct?

An authorization is the chain buyer or the buying office that said you're approved. Then that is an actual order. Not an order, an actual commitment. However, we’ve seen it happen. A buyer may change. New buyer comes in and you don't get the sale. Or the buyer may change their mind, which happened with a major retailer we don’t want to have it in October, we’ll have it in April. It is just too late. So, until you get the order – you have a very high indication, but until you get the order, you don't have it.

Sure. Well, I understand that. A question for you with regard to gross margins. I was looking at the third quarter. It’s 32.5%, which for the year you were at 35%. What do you expect your margins to be going forward? Are they going to move up to 35% range, which you've discussed in the past, or are we looking at 32.5%?

Well, as I explained, we have a higher depreciation number in cost of goods, which lowered that. So, you’re really running more parallel to what you had before. However, with higher sales, we should move up to 34% to 35%.

Okay, all right. And then, your SG&A, you expect to be able to keep it around 25%, 26%?

Actually go down as a percentage of sales as our sales have increased. So, we should be substantially lower if we can get higher sales.

Okay. Question with regard to financing and balance sheets questions, it appears that your accounts payable, vendor payables are 90 days or more. Given the fact that you expect to increase your volume, you have pressure from your vendors? Will they be able to extend more in terms of dollar credit? Or you would have to do a refinancing in order to create the ability to finance the growth over the next six to nine months?

We have very significant working capital commitments. So, we do not see any pressure there.

So, you have the availability under your current lines?

Yes. We have available. And we expect with very positive cash flow resulting to substantially reduce our interest rates in the next several months.

Okay. And the last question is, you've made certainly aggressive statements with regard to annual run rates over the last 12 months to $40 million to $50 million to $40 million. I didn't hear that this time. Are we looking at a $40 million run rate at some point early on?

We’re looking to be between 40 and – I would say, by first quarter, going into the second quarter. What happened is we have had a number of commitments and they have been pushed back, start dates. But they are there. So, we are with that same feeling in terms of run rates.

Okay. All right, thank you. I can do my modeling now and I appreciate it very much. Overall, continued success and I hope to continue to support you.

Thank you, Herp.

[Operator Instructions]. Today’s next question comes from Fred Orr, a private investor. Please go ahead.

Thank you very much. Most of my questions were answered by the – from the last caller’s line of questioning. So, I’ll pass. Thank you.

And, ladies and gentlemen, this concludes your question-and-answer session. I’d like to turn the conference back over to the management team for any final remarks.

I’d like to think all you for participating on today's call. We look forward to talking with you again to review the results of the final fiscal quarter. Have a great day.

Thank you.

Thank you.